Summary

As before, I recommend buying TDCX Inc. (New York stock market :TDCX). My opinion hasn’t changed since I started written about TDCX; rather, this piece serves as a follow-up to the thesis in light of the undertaking Third Quarter 2022 Earnings Report. In my view, TDCX’s current valuation is still attractive and has the potential to earn investors a 1-year return of 26%.

Revenue overview

TDCX reported revenue of S$173 million and adjusted EBITDA of S$55 million, with a margin of 31.8% for the quarter ending September this year. Even though the economy as a whole is weak and the tech industry is slowing, I suspect year-to-date growth has been driven by a strong contribution from travel and hospitalizations following the COVID rebound, a more great contribution from new geographies like Colombia, India, Romania and South Korea (10% revenue growth) and the rise of a major short video platform are something to be proud of.

With 6 new logos added during the quarter, the year-to-date total for new TDCX logos now stands at 31%. On the other hand, in 3Q22, 72 customers had launched campaigns, compared to 48 customers in the previous quarter. Another thing to note is that TDCX has used technology and organizational optimization to continue to meet the campaign needs of these clients despite a constant exodus of staff.

The omnichannel CX solution is gaining momentum

If we focus on the travel and health sectors, we see that the business has maintained its strong momentum since reopening, and that 29% of its sales are back to where they were before Covid. Management is optimistic about the continued expansion of the industry through 2023, thanks to the opening of markets in North Asia. On the other hand, fintech revenue has grown by double digits every year, with crypto customers contributing less than 1% of total revenue.

Marketing services have done well, but I expect a slowdown in the short term

In the third quarter, TDCX Inc.’s revenue grew 32% to S$43 million, with the leading short-form video platform contributing the bulk of the growth. Therefore, I expect growth to decelerate in 4Q22E and FY23E as global technology platforms reduce advertising budgets in response to macro and industry headwinds.

Strategic plans to expand internationally

TDCX’s international presence is a strength and the company’s efforts to expand internationally appear to be paying off, as evidenced by the fact that Colombia, India, Romania and South Korea have all contributed. 10% to business growth.

North Asia and Latin America, previously underserved markets for TDCX, are now expected to become major revenue generators for the company, in my understanding. TDCX also opened its new campuses in the Philippines and Turkey in 3Q22. TDCX is better equipped to expand into the Middle Eastern and Asian markets with the 3,000 m² Turkish campus, which offers services in Turkish and Arabic in addition to European languages. TDCX has converted a Hong Kong associate into a wholly owned subsidiary to accelerate its growth in Greater China. TDCX intends to expand to Indonesia, Vietnam and Brazil in the future.

Even though these changes haven’t shown up in the numbers yet, I’m sure TDCX is moving forward and will benefit in the long run.

Continued success in signing new logos

Compared to the 20 clients signed during the same period last year, the company’s 12 new logos during the quarter represent a slowdown. Cloud hosting and automated food delivery are just two of the 12 new customers. Management emphasized continued diversification of customer focus, noting that non-top five, broad-based customers are growing at more than twice the group’s growth rate. The top two customers accounted for 56% of total revenue in the quarter, compared to 63% the prior year, while the top five customers accounted for 82% of total revenue, compared to 85%.

Salary is always a headache

The latest report includes some “bad” news: the cost of employee benefits rose 30% in the last quarter. The cost of living and the competition for skilled workers have increased, making this a reality. By contrast, TDCX has been able to continue delivering projects despite a rapidly expanding pipeline and the loss of a significant portion of its talent pool in recent quarters. Management says wage growth is an industry-wide issue and that better labor management at TDCX could increase demand for currently outsourced services.

Management tips

TDCX has reduced the revenue range it expects to achieve in FY22 from S$650-675 million to S$655-670 million, with the midpoint remaining unchanged at S$662.5 million . I foresee a slowdown in global Internet growth and continued cost-cutting initiatives, both of which will put pressure on omnichannel CX solutions and digital marketing businesses despite positive trends in travel, health and fintech. But relative to its global counterparts, the high exposure to fast-growing markets in Asia and the Pacific can help reduce downside risks.

Assessment Update

I think the current market price still presents a decent entry point for investors to enjoy a 1-year yield of 26%.

Main model updates:

1. Sales: growth rate reduced to reflect new consensus estimates
2. Valuation: TDCX went from 16x to 15x, and with the same conviction I assumed there would be no change in the forward multiples. Any positive changes will definitely add more to the action.

Conclusion

There are a number of reasons why I believe TDCX will continue to outperform its competitors in the years to come. These include: 1) its large new economy customer base (93% of FY21 revenue); 2) its attractive market opportunity in the outsourced CX solutions industry; 3) its unique, customer-centric and tech-enabled work culture; and 4) its successful offshore model, which can help TDCX Inc. expand globally.