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.
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.
| Syntel | Infosys | Wipro | |
|---|---|---|---|
| Market Cap | $2.96 B | $28.40 B | $20.77 B |
| P/E current | 15.18 | 16.46 | 16.52 |
| P/E Fwd | 14.95 | 16.84 | 18.39 |
| Op margin | 29.89% | 24.88% | 18.24% |
| ROE | 33.93% | 26.80% | 20.86% |
The business environment is also improving, which was evident in the strong guidance given by Syntel, Inc. (NASDAQ:SYNT)’s bigger rivals.
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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