• 1Q23 results were in line with expectations. 1Q23 revenue/PATMI at 23%/25% of our FY23e forecasts. Adj. PATMI was at 19% of our FY23e forecasts, negatively impacted by S$5.1mn net reversal in SBC.
• Revenue mix continued to diversify; 76% revenue contribution from top 5 clients (1Q22: 83%). Revenue ex-top 5 clients grew 45% YoY.
• Travel & Hospitality vertical improved 34% YoY as cross-border travel continued to rebound. Increasing outbound China travel expected to be tailwind.
• Long-term tailwinds in the expanding BPO market should continue to benefit TDCX, with the company well-positioned to capture much of this due to its strong presence in Asia. Due to recent share price performance, we upgrade to BUY with an unchanged DCF (WACC 10.4%, g 3%) target price of US$12.10.

The Positives

+ Continued diversification in revenue mix. Revenue, excluding its top 5 clients, grew 45% YoY. Top 5 clients’ revenue contribution as a % of total revenue stood at 76% in 1Q23 (1Q22: 83%). Newer geographies incorporated in 2021 (South Korea, Colombia, Romania) are also starting to show meaningful contributions, with revenue growing >4x in 1Q23 vs 1Q22.

+ Travel & hospitality continued to be a bright spot. Revenue from the company’s 2^nd largest vertical was up 34% YoY, more than offsetting the slight contraction in YoY revenue from the company’s largest vertical (Digital Advertising & Media). Growth in this vertical was boosted by continued rebound in cross-border travel, with an expectation for this trend to continue as outbound China travel increases.

+ Leveraging AI for growth. ~70% of TDCX’s business is B2B, with many of these clients looking for increasingly complex business solutions. TDCX recently launched TDCX AI, a new specialised consulting division to meet this need – using AI insights and tools to deliver highly personalized and complex customer experience (CX) solutions for clients at a faster pace. Additionally, TDCX is also investing in generative AI tools for improved operational efficiency.

The Negative

– Margin dip due to business expansion. 1Q23 Adj. EBITDA margins were down 7% point YoY to 24.2%. There were several reasons for this: 1) absence of non-recurring government grants from 1Q22; 2) increase in general overheads (hiring and training of new staff) due to expansion into 2 new geographies; 3) increase in group corporate costs excluding SBCs.