Syntel, Inc. (SYNT), Infosys Ltd ADR (INFY), Wipro Limited (ADR) (WIT): What Makes This Small Outsourcing Firm a Buy?

Syntel, Inc. (NASDAQ:SYNT) is one of the leading providers of IT and knowledge- process-outsourcing (KPO) services. The company has been reporting steady growth despite operating in an extremely competitive environment. It has recently released its quarterly results in which it has again beaten both top- and bottom-line estimates by crossing the $200 million quarterly sales benchmark. This is the third time in a row that Syntel has delivered better earnings than market expectations.

In its results announced two weeks ago, Syntel, Inc. (NASDAQ:SYNT) reported a 13% year-over-year and 7% sequential increase in revenue to $202.5 million, which beat analysts’ estimates by $4.6 million. Its net income also increased by 9.5% year-over-year and 2.3% sequentially to $47.5 million. This translated into EPS of $1.14, which was $0.09 above estimate. Applications outsourcing has been the core business of the firm from where it gets 76% of its total revenue. The third-consecutive revenue beat has translated into even higher expectations for the current quarter and the full year. The quarterly EPS estimates have gone up from $1.12 to $1.15 while the annual EPS target has moved up by $0.08 to $4.48.

Following the earnings release, the outlook for the company is more positive than it was before.

The company has operations in the two corners of the world, the United States and India, which makes it truly a global operator poised for future growth. Although the company currently earns 92.3% of its revenue from North America and 7% from Europe, it is eying expansion in the Asia Pacific region.

Its operations in offshore-IT services are looking particularly promising due to its relatively higher margins.The company generates its revenue from a variety of industries ranging from financial services — from where it gets more than half of its revenue — to retail.

A significant portion of its sales, nearly a quarter, comes from its biggest customer American Express Company (NYSE:AXP), while almost all of its 25 largest clients are from the list of Fortune-500 companies.

Expansion plans

Syntel, Inc. (NASDAQ:SYNT) will spend up to $65 million as capital expenditure this year. The company is currently eying expansion by setting up global delivery centers (GDCs) in Tamil Nadu, India and Manila, Philippines. Its top management believes that the Philippines would offer greater opportunities in healthcare KPO than India. Besides entering new locations, Syntel is also expanding its existing GDCs. By the end of June, Syntel had more than 22,800 employees and through expansion, it plans to increase its workforce to a total of 100,000 people.

Syntel, Inc. (NASDAQ:SYNT)’s market cap is slightly less than $3.0 billion, which makes it considerably smaller than other India-based IT outsourcing firms such as Infosys Ltd ADR (NYSE:INFY) and Wipro Limited (ADR) (NYSE:WIT). As mentioned earlier, market’s expectations from Syntel have been rising, but its PEG ratio, based on five-year growth expectations, is just 0.9 as opposed to a 10-year average of 1.0. This indicates that market’s expectations are still lower and therefore the company could very well beat the next quarter’s earnings estimates as well.

Moreover, Syntel, Inc. (NASDAQ:SYNT)’s stock is reasonably priced and is trading at lower multiples of its trailing-12 months and current full-year profit estimates as compared to the shares of Infosys and Wipro. The company has also been more profitable than Infosys and Wipro by earning higher operating margins. It was also able to generate a better return on equity than its rivals.

The business environment is also improving, which was evident in the strong guidance given by Syntel, Inc. (NASDAQ:SYNT)’s bigger rivals.