I valued RITES last month and found it grossly undervalued. It had been a stellar month since then, the stock growing by 15%. They released their Q4 results today and it looks like they have recovered from the COVID shock. I took another look at the valuation with the updated numbers, keeping the story the same.
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 = 7.98%
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 ₹430.26, about 55% higher than the last traded price of ₹276.50.