I first valued RITES in May and found it vastly undervalued. I bought the stock then and held it after I revalued it in June. The last two months have been frustrating with the stock going nowhere. The company released their Q1 numbers last week and I took another look at the valuation. I decided to keep the story same as I saw nothing in the last 3 months that cause a material change at how I looked at the company.
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 = 8.24%
Valuation
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 ₹401.04, about 50% higher than the last traded price of ₹268.20.