Infosys Ltd ADR (NYSE:INFY) is the second-biggest Indian IT outsourcing firm and like Syntel, it also gets a significant portion of its revenue, more than two-thirds, from North America. Its stock has delivered a decent performance this year and is just behind the S&P 500. But what makes Infosys attractive is its impressive return on equity of nearly 27%, a 10-year history of EPS growth and zero long-term debt levels.
However, Infosys has been under margin pressure amid severe competition but the drop in the value of the Indian rupee would ease up some pressure.
But the company delivered better-than-expected quarterly results on July 12 and has reaffirmed its FY-2014 guidance. Infosys’ investment in Lodestone, cloud computing and big data is also paying off by giving a boost to the company’s top line. With Narayana Murthy at the top, the leadership crisis appears to be over. The company is now looking attractive for long-term investors.
Similarly, on Monday, Wipro Limited (ADR) (NYSE:WIT) issued strong guidance for the September quarter, a rarity in Wipro’s case. It now expects a 2% to 3.9% sequential increase in revenue as opposed to market expectations calling for a 1% to 3% increase. In its recent earnings release, its EPS of $0.11 came inline with market expectations and was unchanged from the year-ago quarter; but revenue dropped by 13.4% to $1.6 billion, missing Wall Street’s expectations by $170 million.
Wipro’s shares have struggled this year, but the stock is still more expensive than its rivals, which is evident in its higher price-to-earnings ratio. Despite showing margin improvements in the current quarter, it still earns a lower operating margin than Infosys or Syntel. The company also generates a lower return on equity (shown in the table above). Therefore, I wouldn’t recommend Wipro at the moment.
Syntel, Inc. (NASDAQ:SYNT) has solid fundamentals, revenue and income growth and a good track record of beating market’s expectations. Its stock has delivered an impressive performance this year and is up by 34.4%, easily outperforming Infosys (up 18.9%), Wipro (down 2.6%) and the S&P 500 (up 20.4%). Its international presence, diversity of revenue streams and focus towards serving the mega-cap companies highlights strengths in Syntel’s business model.
The company’s significant exposure to the financial-services sector could also result in a considerable increase in revenue in the near term as financial institutions are expected to increase their IT spending under new requirements coming from the Dodd-Frank Act and Basel III.
Therefore, despite its rally, Syntel is still trading at a reasonable price and could be a healthy addition to our portfolio.
Sarfaraz Khan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Sarfaraz is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article What Makes This Small Outsourcing Firm a Buy? originally appeared on Fool.com and is written by Sarfaraz Khan.
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