TDCX - TDCX: Some Positives And Negatives

2023-07-03 13:25:26 ET

Summary

• TDCX's key negatives are the company's lackluster top line and EBITDA guidance for the current fiscal year.
• On the flip side, TDCX has reduced its client and geographic concentration risks with its diversification efforts, and there is the potential to conduct value-accretive share buybacks in the near term.
• I keep my Hold rating for TDCX unchanged, as there are both negatives and positives relating to the stock.

Elevator Pitch

I continue to have a Hold rating for TDCX Inc. ( TDCX ) stock. My prior February 3, 2023 update for TDCX touched on its prospects and valuations.

With the current article, I detail the key positive and negative read-throughs from TDCX's key metrics. On the positive side of things, I have a favorable opinion of TDCX's share buyback plan and diversification efforts. On the negative side of things, TDCX's FY 2023 financial guidance doesn't offer much for investors to be optimistic about. Therefore, I see no reasons to change my existing Hold rating for TDCX.

Key Negatives

There are two major negatives for TDCX that investors should pay close attention to.

One key negative is that TDCX left its full-year FY 2023 top line expansion guidance (+3%-8%) unchanged, even though the company's first quarter revenue exceeded expectations. This suggests that TDCX's revenue growth prospects for the rest of 2023 won't be as good as what some bullish investors would have hoped for.

Revenue for TDCX increased by +8.2% from $114.9 million for the first quarter of 2022 to $124.3 million in the first quarter of this year. TDCX's actual sales for Q1 2023 beat the analysts' consensus estimate by +5.1% ; and the company's first quarter top line expansion rate, adjusted for foreign exchange effects, was an impressive +13.1% as disclosed in its Q1 results release .

But TDCX's strong revenue growth momentum for the first quarter is unlikely to be sustained for the remainder of 2023, considering that the company declined to raise its full-year revenue guidance. At the company's Q1 2023 earnings briefing in June, TDCX emphasized that "sales cycles have lengthened" and noted that "clients remain hesitant to commit into more business in the near term." This could help to explain why TDCX didn't make any changes to its FY 2023 revenue guidance.

The other key negative is that TDCX expects its operating profitability to further deteriorate in the current fiscal year.

TDCX's normalized EBITDA margin contracted by -320 basis points from 33.3% in FY 2021 to 30.1% for FY 2022. Looking ahead, TDCX has guided for its non-GAAP adjusted EBITDA margin to decline further by -3.1 percentage points to 27.0% in FY 2023 based on the mid-point of its guidance. The gloomy outlook for TDCX's future operating profitability is supported by the fact that the company's normalized EBITDA margin decreased by -7.0 percentage points to 24.2% for Q1 2023.

The company attributed the weaker operating margin outlook to factors like "geographic expansion, choosing to recruit in good times ahead of projected growth", and maintaining "strong support and shared service staff ratios" at its first quarter results call.

More significantly, TDCX's actual non-GAAP adjusted EBITDA margin for FY 2023 might turn out to be even lower than what it guided for. TDCX cautioned at its most recent quarterly results briefing that its current EBITDA guidance has yet to take into account recent "investments such as our Digital CX Center of Excellence and our recently launched TDCX AI arm."

In the subsequent section, I detail some of the positives for TDCX.

Key Positives

TDCX's positives relate to the company's diversification moves and capital return approach.

A positive for TDCX is the company's efforts relating to diversification by both customer and geography.

TDCX revealed in its Q1 2023 earnings release that the revenue contributed by its five largest clients decreased from 83% in the first quarter of 2022 to 76% for the first quarter of the current year. As mentioned in the preceding section, the company's total revenue grew by +8.2% YoY in Q1 2023. As a comparison, revenue for TDCX's other smaller customers, excluding the five largest clients, surged by +45% YoY for the most recent quarter.

Separately, TDCX continued to expand the company's presence in new geographic markets, which reduces its geographic concentration risks. Specifically, the company ventured into four, three, and two new geographical markets in 2021, 2022, and 2023 year-to-date, respectively.

In summary, TDCX's risk profile has improved, thanks to the company's efforts to lower its revenue concentration in specific customers and geographic markets.

Another positive is the potential for shareholder value enhancement with TDCX's shareholder capital return strategy.

TDCX doesn't pay any dividend. Instead, the company chooses to return excess capital to its shareholders via opportunistic share repurchases.

In March last year, TDCX initiated a $30 million share buyback plan . It is worth noting that there is no expiration date for TDCX's share repurchase plan. This implies that TDCX has no pressure to execute on share buybacks within any specific timeframe. Instead, TDCX has the flexibility to time its share repurchases in an opportunistic manner, i.e. when the company's shares are undervalued.

TDCX has spent an insignificant $30,000, buying back its own shares for the first five months of 2023. TDCX's shares have corrected by a substantial -39.4% in this year thus far. The stock's current valuations appear to be undemanding, considering that it is trading at 6.3 times consensus forward next twelve months' EV/EBITDA and 12.6 times consensus forward next twelve months' normalized P/E (source: S&P Capital IQ ) now.

In my view, TDCX is likely to do more share buybacks for the rest of the year, which will be value-accretive based on its current valuations. At its Q1 2023 results call, TDCX acknowledged that the amount of share repurchases it did in January-May 2023 was "relatively small", and noted that "valuation" will be one of the key considerations for future share buybacks.

Closing Thoughts

My conclusion is that TDCX isn't worthy of either a Buy or a Sell, as the stock boasts a mix of positives and negatives. As such, a Hold appears to be the most appropriate rating for TDCX.

For further details see: