• Revenue expected to grow 2-Yr CAGR of 25%, riding on the growth of leading new economy clients like Facebook and Airbnb.
• Increased client count by 37% in FY21, with a Southeast Asian outsourced CX market that is expected to grow at a 13% CAGR until FY25e.
• Stable, cash generative, asset-light business model, for quicker scalability and flexibility
• Initiate coverage with a BUY recommendation and DCF-based target price (WACC 9.7%) of US$22.00.

Company Background

TDCX Inc. operates as an outsourced digital customer experience provider focusing on Omnichannel Customer Experience (CX), Sales & Digital Marketing, Content Monitoring & Moderation. CX solutions are provisions of services that enhance how a business interacts with a customer throughout the customer’s lifecycle, examples of this include: after-sales service and support; design and marketing of a company’s web platform.

Investment Merits

1. Growing existing client revenues in scale and scope. TDCX posted revenue of S$555mn in FY21, increasing 28% YoY, and has been growing at a 45% CAGR since FY18 – in line with growth among new economy companies. 90% of its revenue comes from its existing clients, many of whom are new economy industry leaders like Facebook and Airbnb. The company has also grown its existing client revenues organically in scale and scope, increasing the number of contracts and headcount under each client, and cross-selling additional services. A reason for this is that as companies grow, the larger the requirement is for business support functions like CX to support this growth.

2. Expanding into new CX verticals, with tailwinds from SEA CX market. In FY21, TDCX increased its client count from 38 to 52, expanding into verticals like FinTech, Gaming, and Food Delivery. We think that this expansion across verticals is essential to diversifying and reducing the company’s revenue concentration risk. Additionally, the Southeast Asian New Economy CX market – TDCX’s main addressable market, is expected to grow at a 3-YR CAGR of 13%, further enhancing its new client acquisition efforts. A big reason for this growing market is the fact that fast growing new economy companies neither have the capabilities, nor the patience, to take on large hiring and training projects to support labour intensive portions of its businesses. As a result, they outsource these services to CX companies like TDCX who specialize in efficiently scaling labour intensive functions such as CX, or other back office requirements. We think that TDCX’s: 1) ability to grow existing client relationships organically; 2) ability to acquire new clients and expand across new verticals; 3) tailwinds from a growing Southeast Asian CX market, should support revenue growth of 25% YoY over the next 2 years.

3. Stable, cash generative, asset light business model. TDCX employs a very stable, cash generative, asset light business model. EBITDA margins have remained in a steady range of 30-33%, with net margins around 20%. PATMI has also been growing steadily at a 3-yr CAGR of 37% from FY18 to FY21, and we expect this growth to continue at 35% over the next 2 years. TDCX also uses an asset-light business approach, where all their offices are leased not owned, allowing for more financial flexibility when scaling up or shifting allocation of resources.

We Initiate coverage with a BUY rating and a target price of US$22.00 based on DCF valuation, with a WACC of 9.7% and terminal growth of 3%.

REVENUE

TDCX generates revenue from providing services and solutions in 3 main areas: 1) Omnichannel customer experience (CX); 2) Sales and digital marketing; 3) Content monitoring and moderation. 62% of all revenue is generated from omnichannel CX, with 22% from sales and digital marketing, and the remaining 14% from content monitoring and moderation (Figure 5). Southeast Asian countries like Singapore, Phillippines, Thailand, and Malaysia contribute about 91% of revenue, with 8% coming from north Asian countries like Japan and China, and the remaining 1% from the rest of the world (Figure 6).

The company posted S$555mn in total revenue for FY21, representing a 28% YoY growth, below its 3-year CAGR of 45%. Also, FY21 was a very good year for TDCX as it added 20 new clients, compared with only 9 new additions in FY20, and ended the year with 52 total clients. TDCX has been aggressively adding clients in new verticals to its portfolio, particularly in FinTech, Gaming, Crypto, and Food Delivery. Revenue from FinTech and Gaming grew 67%, and 99% YoY respectively in FY21. Besides new verticals, the company has also focused on expanding into new geographies in countries like Colombia, Romania, India, and South Korea.

Omnichannel CX: This segment is the bread and butter of TDCX, contributing slightly over 62% of total revenue. Revenue from Omnichannel CX grew 22% YoY in FY21 to about S$347mn, and has been growing at a 3-year CAGR of 42%. We expect YoY growth to pick up slightly in FY22e to about 25%, led by a strong rise in new contracts over the last 2 quarters of FY21 (Figure 7).

Sales & Digital Marketing: This segment saw 73% YoY growth in FY21, posting revenues of S$115mn, in part due to a very strong rebound in the overall digital advertising industry after a weak FY20 plagued by budget cuts due to COVID-19. We do expect growth in this segment to temper slightly to around 40% YoY growth due to a moderation in the digital advertising market (Figure 8).

Content Monitoring & Moderation: Revenue from content monitoring and moderation only grew 7% YoY to S$8mn in FY21. Part of the slower growth rate in this segment is due to the fact the TDCX had only 1 social media client under this segment – Meta Platforms. However, the company recently acquired 2 new contracts from a gaming platform, and another social media company, which should help to boost growth in this segment moving forward. As a result, we expect growth in this segment to be around 9% for FY22e (Figure 9).

Revenue Growth: We expect revenue growth to come mainly from existing new economy clients, especially as revenues from new clients tend to start expanding only after about 2-3 years. We expect this growth to also be heavily supported by tailwinds in the overall Southeast Asian digital CX industry for new economy companies, which is expected to grow at a 5-year CAGR of 13%. We are buoyed by TDCX’s ability to continue adding new clients YoY, as well as growing revenue from its existing clients. For FY22e, we expect total revenue growth to increase slightly to 25% YoY, or around S$696mn, roughly in line with the company’s guidance of S$690mn-700mn, led to strong growth across all segments and verticals

RULE OF 40

The “Rule of 40” was first introduced as a benchmark to measure the balance between growth and profitability of SaaS companies, taking into account both revenue growth, as well as profitability (Revenue Growth + EBITDA Margins), with the addition of both metrics needing to exceed the 40% threshold. We have modified this slightly by averaging revenue growth over a 3-year period compared to just a single period growth rate. Adding together TDCX’s 3-year average revenue growth of 45.2% and its EBITDA margin of 32.4%, the total of 77.6% is > than our required threshold of 40%.

EXPENSES

As a service provider, the bulk of TDCX’s expenses come from employee-related expenses which the company labels as “Employee Benefits Expense”. In FY21, the company recorded S$340mn in Employee Benefits Expense, which represents roughly 61% of revenue (Figure 10). This expense grew 32% YoY, slightly faster than revenue growth, and was primarily due to an increase in employee headcount to support business volume, and share-based expenses from the introduction and implementation of the company’s maiden performance share plan.

MARGINS

TDCX recorded gross profit margins of 38.8% for FY21, a slight decrease from 40.7% the year before, and was mainly due to an increase in Employee benefits Expense.

EBITDA margins for FY21 remained stable at around 32.4% (Figure 11), with a 4-year range of  30-33%. This is significantly higher compared with its peers: TaskUs (24.8%), Concentrix (16.2%), Teleperformance (15.1%), Telus International (24.6%)

Net margins for FY21 were 17.6% (Figure 12), and have been decreasing slightly over the last few years, this has been largely due to an increasing effective tax rate.

BALANCE SHEET

Assets: Cash and cash equivalents increased from S$60mn to S$313mn in FY21 (Figure 13), due to an inflow of capital from the company’s IPO listing. Receivables increased from S$49mn to S$106mn, and this was due to a couple of large clients that had some administrative challenges, leading to a backlog in billings. These receivables had been recovered during the middle of 1Q22. TDCX recorded total assets of S$582mn in FY21.

Liabilities: Short-term and long-term debt reduced by S$10mn and S$13mn respectively, and this debt was paid down using cash from the company’s IPO listing in FY21. Other payables were recorded at S$39mn for FY21, with lease liabilities (both current and non-current) amounting to S$36mn.

CASH-FLOW

TDCX recorded Free Cash Flow (FCF) of S$83mn in FY21, a 27% YoY decrease from FY20, largely in part from a S$58mn increase in receivables which were collected only in 1Q22. The company has been FCF positive since FY18, and we expect this trend to continue moving forward based on its highly stable, cash generative business model.

BUSINESS MODEL

TDCX operates as an outsourced digital customer experience provider, with 3 main pillars of focus: Omnichannel Customer Experience (CX), Sales & Digital Marketing, Content Monitoring & Moderation. The company focuses predominantly on servicing fast growing new economy clients, particularly in the Southeast Asian region, while looking to other Asian and European markets for opportunities to expand. As of end FY21, TDCX had 52 clients, 20 of which were added in FY21 alone, and extend to a wide range of verticals ranging from travel and hospitality to fintech. Prominent clients of TDCX include leading social media platform, Facebook, leading travel & hospitality platform, Airbnb, and leaders in other high-growth verticals (Figure 14).

The company currently has almost 15,000 employees globally, with 3,000 additions in 4Q21 alone (Figure 15), and is constantly striving to keep up with the needs of its fast-moving clients. TDCX has a very extensive network of delivery centers both from a local level, and a regional level, with talent proficient in more than 20 languages and a deep understanding of high-growth verticals in the region – a key component when serving such a diverse group of geographies. From a strategic point on view, leverages on its expertise and presence in the different countries it operates in to help cross-border expansion of its clients.

TDCX leverages on technology like Artificial Intelligence and Machine Learning to improve the quality and efficiency of its services, they also deploy bots and robotic process automation (RPA) to drive productivity gains. As their business model is very labour reliant, TDCX has also developed a proprietary virtual recruitment platform, Flash Hire, to assist in speeding up its own hiring process, improving the company’s ability to scale and fulfil the requirements of its clients at a fast and efficient rate. According to the company, Flash Hire helped to reduce hiring time by almost 62%.

TDCX’s revenue stream comes mainly from service contracts it negotiates with its clients, which usually run from 1-3 years and are generally quite sticky in nature. Some of the terms in these contracts include clauses like variable relocation benefits, which allow TDCX to charge their clients accordingly if the cost of living fluctuates in a particular region.

Omnichannel Customer Experience (CX): This segment entails managing clients’ customer relationships by providing both inbound and outbound customer experience solutions, which also generally cover the entire life-cycle of the customer. The services that fall under this segment are also usually highly tailored to specific companies or verticals, and also involve more complexed interactions between agent and customer – technical end-user troubleshooting for software and consumer electronic devices, aftersales service and support, etc. TDCX uses metrics like average inbound holding time and percentage of first call resolution to measure its service levels.

Sales & Digital Marketing: It develops digital advertising campaigns for B2B and B2C clients to market their products and services. For B2B, this usually involves helping an advertising platform client grow and attract more advertising dollars, while B2C generally involves more sales and direct-marketing capabilities for clients. TDCX leverages on its analytical capabilities in this domain to provide valuable business insights to increase marketing efficiency. Return on advertising spend and conversion ratios are some metrics TDCX monitors to ensure performance of its marketing services.

Content Monitoring & Moderation: It assists clients in creating a safe and secure online environment for social media and gaming platforms through content monitoring and moderation services performed by an actual human.