Syntel - A Plea For Help

I don't oftentimes purpose the weblog to honor people who tin exactly "tell me the story" but I am becoming increasingly puzzled past times Syntel (SYNT:NASDAQ), an Indian outsourcing society in addition to a challenger of Infosys in addition to similar companies.

This is a society I convey had continuously analytically incorrect - but made (very small) profits. I would rather live lucky than smart (and inward this representative I convey been lucky) but alongside you lot beloved readers I promise to live lucky and smart.

I institute Syntel on a systematic search for companies that were hence incomprehensibly profitable that fraud was a reasonable suspicion.

Syntel was 1 of virtually xxx that came up. (Incidentally that same search generated some longs when nosotros worked out why the businesses were hence profitable...)

Anyway Syntel was full of carmine flags which made us investigate farther for fraud. (We found no evidence of fraud inward the halt - but nosotros did look.)

Here are our carmine flags.

• Syntel has a fatter margin than most Indian outsourcing companies. On a quick search of Thomson Reuters the margin is virtually five percent points fatter than most of the competitors. We could honor no convincing explanation.
• The fatty margin meant the society was extraordinarily profitable. Which is good in addition to proficient - except that they never paid a dividend in addition to never bought dorsum whatever shares.
• The past times profits - almost inward their entirety - sat inward cash in addition to curt term securities - undistributed inward India. When this happens inward Red People's Republic of China it is a really rigid red-flag.
• The society was run past times a hubby in addition to married adult woman team. The board seemed really incestuous - controlled past times the said team.
• A search of LinkedIn showed an enormous issue of fundamental staff who had left to competitors - sometimes for seeming demotions.

The Indian outsourcing manufacture has had accounting frauds earlier (see the major fraud at Satyam) in addition to hence I had marked Syntel every bit something to enquiry in addition to perchance practise a large enquiry slice on.

I was non the alone someone who idea the cash balances (which got to over a billion dollars) were weird. Here is an extract from a Seeking Alpha article referencing a conference call:

"Great, thanks. I wanted to come upwards dorsum to cash, unfortunately it's actually the alone enquiry I have. We've heard for years, cash has been a board intelligence in addition to it's evaluated every quarter. Can you lot portion what reluctance has been from a board grade to position the cash to move from an M&A perspective? And hence given, there's been sluggish increment for a span of years, has the board's mental attitude towards M&A modify at all or is it nonetheless exactly every bit cautious every bit it has been inward the past?" 

Result? Complete shutdown from management - non surprising. Further, at that spot is no run a jeopardy of activist interest hither given founder Bharat Desai's stranglehold on ownership (owning 2 thirds of the mutual shares outstanding). This was of class something I knew going in, but it is something for investors to consider that are weighing their seat inward the company.

When management convey a billion dollars sitting closed to that they practise non purpose in addition to volition non explicate the purpose of hence nosotros wonder whether something actually fishy is going on. 

This society exactly seemed too profitable. And when something is seems also proficient to live truthful it oftentimes is also proficient to live true.

Failed research

At Bronte nosotros are a fairly paranoid virtually companies that seem also profitable. We run into 2+2=4 in addition to retrieve nosotros ought to investigate for major fraud.

We spent virtually a calendar week on it in addition to got nowhere. We only could non honor anything beyond these red-flags. 

However I could non convince myself of the excessive profitability either - hence I kept a minor - in addition to I hateful tiny - seat curt - exactly to forcefulness me to monitor results inward the promise I would lastly actually move it out.

Alas this disappeared into the (fairly extensive) listing of things that I wanted to pass a span of months researching - perchance to issue an extensive (and negative) enquiry report.

And hence it was forgotten.

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Comprehensively wrong

There are those moments when you lot realise you lot are comprehensively wrong. Syntel gave us 1 of those moments. 

They paid a dividend.

Not an ordinary dividend - a billion dollars - $15 per portion inward dividend which is a lot given the electrical flow stock toll is $20. All of those stored upwards cash in addition to securities were liquidated in addition to sent every bit cash to the shareholders.

Whatever: nosotros idea the society powerfulness live faking its margins - but it is was not. And nosotros know surely it wasn't because they sent a billion dollars of cash out to shareholders. It is tardily to mistaken accounts (they are numbers filed electronically alongside the SEC). It is to our cognition impossible to mistaken the distribution of cash to shareholders. 

And hence nosotros were comprehensively wrong. We turned closed to in addition to bought dorsum our curt (remarkably at a minor profit).

What to practise when you lot are comprehensively wrong...

I convey learned from sense that when I am comprehensively incorrect virtually a curt it is oftentimes really profitable to plow closed to in addition to acquire long the same stock. Usually I curt funky companies in addition to they are funky for a argue - they are designed to bamboozle onlookers.

But sometimes funky companies are funky because they convey worked out something genuinely novel - some improve mousetrap - in addition to they exactly seem weird. 

Those companies brand proficient speculative longs. 

So nosotros bought a tiny seat inward Syntel in addition to decided (so far alongside fiddling luck) to investigate it every bit a long. 

One of the things nosotros decided was that because the cash was existent (see the dividend) hence the underlying draw of piece of job organization actually was every bit it seemed. And nosotros read the past times dozen or hence conference calls in addition to decided the management were by in addition to large matter-of-fact. They would say you lot when the draw of piece of job organization was turning improve or worse. And they were likely right. 

Given management statements in addition to past times results the stock was - nosotros guessed - trading at virtually ix times earnings of $2.40 or hence for 2017. Given shareholder friendly management (see that dividend) in addition to what seems a superior draw of piece of job organization (see that margin) that did non seem unreasonable.

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Today's results

Syntel today announced results that were non (very) inconsistent alongside guidance but they simultaneously guided downwards pretty sharply in addition to the stock was off 17 percent. The minor (dumb luck) profits nosotros made on the curt nosotros convey by in addition to large given back. 

That said the results are non objectively bad. Cash is edifice upwards on the residue canvas over again (and nosotros know that is real). Margins are nonetheless superior for the business. All-in-all it nonetheless looks on the accounts similar a better-than-decent business.

And I am nonetheless none-the-wiser virtually what makes this draw of piece of job organization tick, why its margin is hence much superior to the contest in addition to why the management convey this strange uppercase resources allotment strategy where they practise zero for years whilst cash builds upwards in addition to hence pay massive dividends.

I am looking for readers - preferably customers of or competitors to Syntel - to explicate what is actually going on.

Because - to live frank - I exactly don't understand.

John