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%
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.