Today Seven Corners Capital Management initiated coverage on Syntel, Inc (SYNT). Specifically, we are long the stock. To find a PDF containing our full SYNT writeup, please visit our Research section [link here]. The highlights of our investment thesis are as follows:
Syntel, Inc. (Ticker: SYNT) is an IT services provider operating mainly out of India. Prior to market opening on September 12, 2016, the company announced that it would repatriate approximately $1.24 billion of its overseas cash in order to pay a special dividend of $15/share on October 3rd to holders of record on September 22nd. Normally, such an occurrence would not be especially remarkable, since the applicable company’s stock price would appreciate by an amount approximately equal to the dividend (either after the announcement or in anticipation thereof, if foreseen by the market). What is unusual about Syntel, however, is that the company’s stock price is just above its level immediately prior to the dividend announcement just two weeks ago (the stock closed at $40.69 on September 9th), despite (i) there being no additional material news regarding the company and (ii) the broader stock market being basically flat, in each case since that date.
Yet Syntel is not a company in decline; far from it. From 2002 to 2015, earnings per share increased at a 16.7% CAGR, while revenues increased at a 14.8% CAGR. The company is led by its founder, billionaire Bharat Desai, 63, who owns over 31 million Syntel shares, or 37% of the outstanding shares. (In addition, Desai’s wife and co- founder, Neerja Sethi owns an additional 29% of the outstanding equity, although due to a trust for which both are overlapping trustees, the combined holdings of Desai and Sethi come to 51.5 million shares, or 61% of the total outstanding.)
Based on price-to-earnings and enterprise value-to-EBITDA valuations further described in Section II.B herein, we believe that Syntel’s current intrinsic value is approximately $54.30, representing upside of 30% from the current stock price. In essence, after backing out the special dividend, an investor in SYNT will own a high quality company at a bargain basement price of just 10X forward earnings (far below the market’s ~18 forward earnings multiple).
We thus initiate coverage of Syntel with a buy rating and a target price of $54.30 (or $39.30 after the special dividend is paid on October 3rd).