High growth enabler
? TDCX is a proxy to the fast-growing digital economy (FY20-23F revenue CAGR: 25.8%) through its strong clientele, such as Facebook and Airbnb.
? A strong track record in wallet share expansion and upselling within existing customers enables TDCX to enjoy industry-leading EBITDA margin of 33%.
? We like TDCX for its recurring revenue model and highly cash generative business. Initiate coverage with an Add rating and TP of US$24.00.
High-growth digital customer experience (CX) solutions provider
A high-growth business process outsourcing (BPO) firm with strong positioning in the digital economy, TDCX enables tech disruptors to remain agile while rapidly entering new markets and expanding product offerings. TDCX has 14,100 staff strength mostly based in SG, PH and MY, and operations in 10 countries as at end-3Q21. Services include omnichannel CX, digital marketing, as well as content monitoring. We like TDCX for its 1) fast-growing and large total addressable market, 2) strong client base, 3) track record in wallet share expansion, 4) unique tech-like work culture, and 5) industry-leading margins.
A proxy for rapidly growing tech disruptors
We see TDCX as a proxy to high-growth tech disruptors and forecast FY20-23F revenue CAGR of 25.8%. As of 3Q21, 93% of TDCX’s revenue was derived from new economy clients, including Facebook and Airbnb. These companies have large TAMs and have grown quickly but often face difficulty scaling operations, which provides outsource opportunities of key functions to TDCX – essentially a recurring revenue model with good cash flow generation. With TDCX’s strong client profile, we believe it is well positioned to further strengthen its presence within the new economy industry. Recent client acquisition
momentum was strong, with TDCX adding 16 new logos in 9M21 (9M20: 9 additions).
Strong track record enables upselling and wallet share expansion
TDCX has proven its ability to scale client relationships over time, expanding its size and scope of engagements. We estimate more than 70% revenue are generated through B2B customer support currently. It achieved 128% revenue-weighted customer retention in FY20 (peer, TaskUs: 117%). For example, a leading search engine client outsourced technical and customer support for its top-tier advertising customers (previously handled in-house) to TDCX. The added responsibility was mission-critical, with a higher level of complexity and shorter turnaround times, allowing TDCX to price at higher levels and generate higher margins. We believe this competency has allowed TDCX to enjoy industry-leading margins (FY20 EBITDA margin of 33% vs. peers’ 20%).
Initiate coverage with an Add and TP of US$24.00
Our TP is based on 18.0x EV/EBITDA (avg. FY22-23F EBITDA), growth-adjusted vs. peer group’s 12.5x, given TDCX’s faster growth profile (we estimate FY21-23F EBITDA CAGR of 22.7%) vs. peer group’s 15.2% (based on Bloomberg consensus estimates). Potential catalysts include strong 4Q earnings and earnings accretive M&A. Key risks include weaker near-term margins due to geographical expansion.