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JPM initiates 'overweight' on TDCX as it is a profitable compounder

JPM starts TDCX off with an 'overweight' rating as it is a profitable play on the growth of the new economy.

JP Morgan is initiating coverage on digital customer experience (CX) solutions company TDCX with an “overweight” rating and a target price of US$13.80, implying a 49% upside from its current share price of US$9.26, as at Oct 3.

The target price is derived at an EV/ebitda multiple of 9.5x, which is at a premium to peers driven by its higher profitability and growth.

Analysts Ranjan Sharma, Sigrid Qiu and Gabriella J Hidayat view the group as a profitable CX play on growth in the new economy.

“We believe TDCX’s roster of industry leaders presents strong growth outlook driven by increasing trend to outsource CX services; rising penetration within existing clients, and growth in clients underpinned by its track record with the industry leaders,” says the analysts.

Already, TDCX’s client number has increased by over 60% from 2020 to the second quarter of 2022. With that, the analysts believe that revenues are likely to show a 15% CAGR over FY2021 ended December 2021 till FY2024.

The analysts also like TDCS for its industry-leading profitability compared to peers. TDCX has higher profitability with an ebitda margin of over 25%, compared to peers that are below the 25% mark. For 2021, the group also had a ebitda/headcount of about US$10,200, compared to peers’ US$3,000 to US$9,600.

“The higher profitability is driven by: focus on the new economy; higher proportion of complex workload; wage cost advantage from operating primarily in Southeast Asia; and industry-low attrition rates,” according to the analysts, who note that talent management is a moat for the group’s business.

Meanwhile, the analysts believe that the group is well placed for potential mergers and acquisitions (M&As).

With TDCX converting more than 10% of its revenues into free cash flows (FCFs), its net-cash position could swiftly grow to over 30% of its current market cap by end-2024. As at Oct 3, TDCX’s market cap stood at US$1.35 billion.

“In our view, this raises prospects of M&A where TDCX could expand its services and/or its geography. TDCX has been evaluating M&A opportunities, per management,” says the analysts.

Despite the generally bright outlook, the analysts have pointed out competition and macro as key risks for TDCX.

The group currently has a 3% stake in a highly competitive and fragmented industry. Its focus on human capital has underpinned its industry-low attrition rates at 25%, compared to the industry average of 30% to 34%, but competition remains a key risk.

Macro risks also include wage inflation and potential weakness in consumer spending impacting its clients. Furthermore, the founder’s 98% voting rights (84% stake) limit the say of holders of Class A shares in corporate affairs and material transactions.

On a whole, TDCX’s current 2024 EV/ebitda of 5.3x reflects concerns over its growth outlook. Hence, earnings delivery will be key to its rerating, according to the analysts. While TDCX has declined 52% since IPO, the stock has gained 12% from 2QFY2022 results and outperformed Nasdaq by 32 percentage points.


Photo: The Edge Singapore/ Albert Chua

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