• 1H22 revenue was in line, at 47% of our FY22e forecasts. PATMI was above expectations, at 56% of our FY22e forecasts due to lower-than-expected expenses.
• Tripled 1H22 client additions compared with 1H21, adding a leading regional airline and a leading car e-commerce platform. Benefitting from travel & hospitality rebound, only 16% shy of pre-pandemic peak.
• We raise our FY22e PATMI by 9% to S$96mn on widening margins primarily due to lower-than-expected interest expenses, while keeping FY22e revenue unchanged. We maintain a BUY recommendation with an increased DCF target price of US$16.39 (prev. US$15.76), a WACC of 10.4%, and a terminal growth rate of 3.0%.

The Positives

+ 15 client additions in 2Q22, 25 for 1H22; more than triple 1H21. The new clients included a leading regional airline, a leading integrated car e-commerce platform, three FinTech companies and one insurance company. New client additions drove revenue up 23% YoY for the quarter, and also strengthened TDCX’s leadership in the e-commerce, travel, and FinTech verticals. TDCX also saw a 40% YoY increase in launched client campaigns, demonstrating an increasing ability to accelerate campaign growth, while maintaining low levels of revenue churn.

+ Benefitting from rebound in travel & hospitality sector in the region. Revenue from TDCX’s travel & hospitality vertical grew about 25% YoY, boosted by upward momentum in travel due to global re-opening over the summer period. Although revenue from this vertical is still about 16% shy of its pre-pandemic peak, the potential reopening of countries in North Asia – China, Japan, etc — does provide optimism for increasing revenue contribution from travel & hospitality in the near-term.

+ Expansion of Adj. Net Margin amidst tougher macro environment, mainly due to reducing expenses. Stripping out share based compensation that did not occur during 1H21, TDCX managed to expand their adj. net margins for 1H22, increasing by 1.4% YoY, from 17.8% in 1H21 to 19.2% in 1H22. One of the main reasons for this was a sharp decline in interest expenses as a result of the company paying off a significant portion of its short-term, and all of its long-term debt. Adj. EBITDA margins remained relatively flat YoY at 31%.

The Negatives

– Higher-than-expected tax rate due to suspension of tax reliefs in MY and PH. TDCX recorded an effective tax rate of about 27% in 2Q22, up from about 21% in 2Q21, mainly due to a one-off “prosperity tax” in Malaysia, and the suspension of a tax holiday in the Philippines.