This is a company I have had continuously analytically wrong - but made (very small) profits. I would rather be lucky than smart (and in this case I have been lucky) but with you dear readers I hope to be lucky and smart.
I found Syntel on a systematic search for companies that were so incomprehensibly profitable that fraud was a reasonable suspicion.
Syntel was one of about thirty that came up. (Incidentally that same search generated some longs when we worked out why the businesses were so profitable...)
Anyway Syntel was full of red flags which made us investigate further for fraud. (We found no evidence of fraud in the end - but we did look.)
Here are our red flags.
- Syntel has a fatter margin than most Indian outsourcing companies. On a quick search of Thomson Reuters the margin is about 5 percentage points fatter than most of the competitors. We could find no convincing explanation.
- The fat margin meant the company was extraordinarily profitable. Which is well and good - except that they never paid a dividend and never bought back any shares.
- The past profits - almost in their entirety - sat in cash and short term securities - undistributed in India. When this happens in China it is a very strong red-flag.
- The company was run by a husband and wife team. The board seemed very incestuous - controlled by the said team.
- A search of LinkedIn showed an enormous number of key staff who had left to competitors - sometimes for seeming demotions.
"Great, thanks. I wanted to come back to cash, unfortunately it's really the only question I have. We've heard for years, cash has been a board discussion and it's evaluated every quarter. Can you share what reluctance has been from a board level to put the cash to work from an M&A perspective? And then given, there's been sluggish growth for a couple of years, has the board's attitude towards M&A change at all or is it still just as cautious as it has been in the past?"
Result? Complete shutdown from management - not surprising. Further, there is no chance of activist involvement here given founder Bharat Desai's stranglehold on ownership (owning two thirds of the common shares outstanding). This was of course something I knew going in, but it is something for investors to consider that are weighing their position in the company.
However I could not convince myself of the excessive profitability either - so I kept a small - and I mean tiny - position short - just to force me to monitor results in the hope I would finally really work it out.
Not an ordinary dividend - a billion dollars - $15 per share in dividend which is a lot given the current stock price is $20. All of those stored up cash and securities were liquidated and sent as cash to the shareholders.
And I am still none-the-wiser about what makes this business tick, why its margin is so much superior to the competition and why the management have this odd capital allocation strategy where they do nothing for years whilst cash builds up and then pay massive dividends.