As with Avanti Feeds and Rajesh Exports I picked RITES Limited from the screen of low debt, high growth companies with low P/E ratio.
Numbers and Narratives
RITES Limited is an engineering consultancy company specialising in transport infrastructure. It earns its revenues primarily through consulting and turnkey projects. A majority of its customers are government and public sector companies and I expect it to continue that trend as the rail infrastructure in our country develops. It is a mature company that has been growing above the industry average over the last 5 years. I expect them to revert to industry average growth over the next 5 years and the margins to decrease over the next 10 years due to increased competition.
The core numbers that I arrive at based on the story are
- Compounded revenue growth for next 5 years = 15% (15% industry average)
- EBIT margin in year 10 = 25% (~32% historical)
- Initial cost of capital = 7.89%
I’ve used the above numbers along with the financial information to compute my DCF valuation for RITES Limited as seen below.
As you can see, the valuation price came out to ₹437.80, about 83% higher than the last traded price of ₹238.35.