Syntel – A Cash Machine
|April 24, 2016||Posted by Oddmund Grøtte under Stock Analysis|
One stock that came up on my scan was Syntel (SYNT) – listed on Nasdaq. The company is an outsourcing company. Their outsourcing is called KPO (knowledge Based Outsourcing, as opposed to BPO – Business Process Outsourcing). KPO is supposedly a higher level where knowledge and skills are necessary and typically attracts higher margins. They have the following divisions: banking and finance, healthcare, insurance, Retail and manufacturing. Banking and finance is by far the biggest with about 50% of revenue. American Express is one of the biggest customers.
Over the last 10 years SYNT has grown a lot:
|Revenue USD Mil||13.63|
|Gross Margin %||0.47|
|Operating Income USD Mil||18.28|
|Operating Margin %||4.10|
|Net Income USD Mil||17.37|
|Earnings Per Share USD||17.08|
|Book Value Per Share USD||22.86027|
|Operating Cash Flow USD Mil||17.15181|
|Cap Spending USD Mil||0.608088|
|Free Cash Flow USD Mil||21.30673|
|Free Cash Flow Per Share USD||30.60809|
|Working Capital USD Mil||25.22355|
Worth noting is that operating margin has grown steadily from 20% in 2006 to 29% in 2015. The company has erratic dividend payments, the last payments back in 2012. There has been no share buybacks. The result is that SYNT has accumulated a lot of cash.
Syntel has fantastic fundamentals:
Excess cash is about 1 bn USD, which equals 12 USD per share. No wonder they accumulate cash: for every USD in turnover the company turns 21% into free cashflow (average over the last 10 years). However, worth noting is that this number has increased from 15% to 23%. CAPEX the last 10 years has varied from 13 to 7% of operating cashflow, so this is not a capital-intensive business.
SYNT has no long-term debt.
PE today based on average net income over the last 3 years is 15. Stripping for excess cash PE is just 11. However, in the report from 1st quarter 2016 on 21st of April company guided 2016 income to about 2.55 – 2.8 per share and revenue about 1.01 bn USD. The stock dropped about 8% on the report and guidance. Looking back at the last ten years PE has on average been around 20, but last two years around 17. Based on this the stock seems just slightly undervalued. However, over the long-term this company should give good return because of its increase in intrinsic value and huge ROIC. Any selloff from here should give a good entrance for the long-term.
Key risk is currency risk. A lot of the income is in indian rupee.
Disclosure: I have no positions in SYNT, but considering buying if it drops below 40.