Wells Fargo Downgrades Syntel After 48% Run, Sees Need For Client Diversification

Syntel, Inc. (NASDAQ: SYNT) shares have run up in the year-to-date period, prompting an analyst at Wells Fargo Securities to press the sell button.

The Analyst

Analyst Ed Caso downgraded shares of Syntel from Market Perform to Underperform and increased the price target from $26 to $29 to reflect the higher multiple assigned to commercial-focused consultants outsourcers.

The Analyst

Syntel's 48-percent year-to-date gain stands in contrast to the S&P 500's 4-percent advance, and the company is the standout performer among outsourcers, Caso said in a Wednesday note.

The analyst left his estimates for Syntel unchanged despite his view that a weaker Indian rupee vis-à-vis the dollar could benefit the company during the quarter.

Caso outlined three concerns about the IT services company: 

• Overreliance on three clients, namely American Express Company (NYSE: AXP), State Street Corp (NYSE: STT) and FedEx Corporation (NYSE: FDX), which collectively bring about 43 percent of Syntel's revenue.
• A focus on applications support, which continues to be plagued by pricing concerns.
• Relatively low exposure to new digital development work, which is perceived to be the key for reviving growth.

"We are concerned that maintaining historically industry-leading margins could prove challenging, but we see near-term results as biased to the upside given an improved outlook for the important financial services and health care verticals," Caso said. 

Wells Fargo sees risks in the need for Syntel to broaden its client-focus beyond the top three and limited liquidity stemming from 60 percent of the shares being controlled by the chairman's family. 

The Price Action

In pre-market trading, the shares were down 3.14 percent to $33.

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