Syntel (SYNT) describes itself as a global provider of custom outsourcing solutions in a broad spectrum of information technology and information technology-enabled services. Their portfolio of services includes complex software application development & maintenance services, platform migration solutions, Knowledge Process Outsourcing (KPO), e-Business development and integration, wireless solutions, data warehousing, and cloud computing implementations. The company was founded in Troy Michigan in 1980 by Bharat Desai and his wife Neerja Sethi, reportedly with an initial investment of $2000. The company went public in 1997 under the stock symbol SYNT. 34 years later Syntel has grown to a company with revenues of $723 MM in 2013 and a current market capitalization of $3.5 B. Syntel employs approximately 23,000 with perhaps 16,000 of those in India. The company has 17 global development centers, 12 in India. Two new centers in the Philippines and Maryland were added in 2013-14.
Over the period 2007-12 revenue grew at a 17% CAGR and EPS at a 24% CAGR. This growth story has rewarded investors with stock appreciation of 173% over the last 5 years and 328% over the last 10 years. This does not include some small dividends paid in the past and some larger special dividends paid in 2007 and 2012. Currently the company is not paying a regular dividend.
Syntel has run a highly profitable business with a Net Profit Margin running in the 19-28% range in recent years which is outstanding. Return on shareholders' equity is excellent running in the 25-38% range in the last 5 years. The company has a solid balance sheet with over $578 MM in cash and only $7 MM (loans and borrowing) in debt.
In its most recent 10-K filing Syntel says it provides services to 135 customers with 78% of its revenues deriving from the top 10 customers. The top two clients are American Express (27% of revenues) and State Street Bank (17% of revenues). This high client concentration is one of the more significant risk factors for the stock. Syntel has put strategies in place to diversify its revenue streams in recent years seeking to "further mine" clients 3-30 and to add additional new clients. Progress with this is something for the investor to watch in coming years. Applications outsourcing accounted for 77% of revenue in the most recent quarter.
SYNT has beaten analyst forecasts in each of the last 4 quarters with an average surprise factor of over 11%. One factor helping earnings has been the strength of the dollar to the rupee. The company collects most of its client revenues in dollars and pays much of its salary base in rupees. This factor should continue to be a near term boost as the US sees higher interest rates propelling the dollar. While many companies that sell into emerging markets have suffered of late, Syntel is benefiting from the stronger dollar. Europe has been a strong area for the company in recent quarters with Syntel reporting that European companies are more open to out-sourcing. Syntel sees Europe as an area for future investment. That could help diversify the client base. Syntel is scheduled to report next on February 13.
Historically Syntel has had better financial metrics than some of its competitors. Its operating margin which is over 29% exceeds that of Infosys (25%) and Wipro (18%). Its return on equity (33%) exceeds Infosys (26.8%) and Wipro (21%).
I would also rank Syntel has having a strong history of maintaining key customers. The company describes this as its "Customer for Life" philosophy. The relationships with American Express and State Street Bank go back more than 10 years. The company also counts Global Delivery as a key competitive strength. Syntel performs its services on-site at the customer location or off-site at Syntel locations. By linking each of its service locations together through a dedicated data and voice network, Syntel believes that it provides a service capacity largely unconstrained by geographies, time zones or cultures. The new service center in the Philippines should further extend these capabilities to customers in Asia and the Pacific regions.
The two founders own a very large portion of the stock (over 60%) with other insiders also holding significant stakes. I have not seen any recent sales by the top two shareholders. While some investors may shy away from a company with this level of insider ownership, my experience has been very positive with similar situations. The owners have a very strong interest in increasing the share price, and are more likely to reward shareholders with special dividends.
Syntel announced a change in CEO leadership on February 4, 2014 with company veteran Nitin Rakesh taking over from Prashant Ranade. Rakesh's previous position was President, Americas Business Development and New Shoring Center. He rejoined the company in 2012 after previously leading Syntel's Knowledge Process Outsourcing business from 2002 until 2008, playing a pivotal role in building KPO into a high performing service line. Ranade will become Executive Vice Chairman of Sytnel's board. Given the prior experience of Rakesh, I do not view this change as a significant risk factor.
This very strong growth story can currently be bought for a very reasonable price. The current P/E ratio is about 17 on a trailing basis and under 16 on a forward basis. This is a rare bargain in the current stock market where many growth companies are selling at multiples of 30 or higher. It is not completely clear why the market is assigning this relatively low valuation to the stock. Syntel has limited analyst coverage with Value Line only disclosing coverage by 9 analysts. The very high level of insider ownership may make the shares unsuitable for some large institutions. I have held positions in the company for a number of years and have added significantly on the recent pullback from 90 to the lower 80s.