I last valued RITES in August of last year and found it vastly undervalued. I held the stock and it has since been a frustrating 6 months. The stock looks to be stuck in a limbo moving nowhere irrespective of the good results. I valued the stock again after they released their Q3 numbers. Here’s that valuation…
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 = 9.75%
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 ₹389.12, about 46% higher than the last traded price of ₹265.65.