TDCX: Consider 2023 Outlook And Current Valuations (NYSE:TDCX)

Elevator Pitch

My rating for TDCX Inc.’s (NYSE:TDCX) shares is a Hold.

Since my earlier write-up reviewing the company’s Q2 2022 results was published on August 29, 2022, TDCX’s stock price has gone up by +51.5% as per Seeking Alpha price data.

The focus of this latest update is the preview of TDCX’s 2023 financial performance and the stock’s valuation analysis. TDCX’s 2023 financial results are likely to be inferior to that of 2022 with respect to top line expansion and free cash flow generation. The stock is also fairly valued, implying limited upside for the company’s shares. In view of these factors, I have decided to lower my rating for TDCX from a Buy to a Hold.

2023 Consensus Estimates

In the past three months, the sell-side analysts covering TDCX’s shares have cut their respective 2023 financial projections for the company according to S&P Capital IQ data.

In Singapore dollar terms, the market’s consensus fiscal 2023 top line for TDCX was reduced by -3.4% from S$796.1 million as of November 3, 2022 to S$769.0 million as of February 2, 2023. During the same period, TDCX’s consensus FY 2023 GAAP earnings per share or EPS was lowered by -2.1% from S$0.97 to S$0.95.

The current consensus financial figures for TDCX imply that the company’s revenue growth (in Singapore dollar terms) will moderate from +18.6% in FY 2022 to +16.8% for FY 2023. The sell-side also forecasts that TDCX’s free cash flow will decline by -11.2% from S$142.2 million to S$126.3 million in the same time frame.

The downward revision of the consensus financial estimates, and expectations of slower top line growth and free cash flow contraction for TDCX in 2023 shouldn’t come as a surprise as detailed in the subsequent sections of the article.

Top Line Outlook

I agree with the sell-side analysts that TDCX’s top line growth is most likely going to be weaker in the current year, and my view is supported by the key metrics highlighted below.

Gartner (IT) has recently cut its 2023 growth forecast for global technology spending from +5.1% previously to a much more modest +2.4% now as per its latest projections issued in January.

TDCX’s recent revenue expansion trends weren’t encouraging as well. The top line growth rate for the company slowed from +41.4% YoY in Q3 2021 and +23.3% YoY in Q2 2022 to +16.1% for Q3 2022. TDCX’s FY 2022 revenue guidance of S$662.5 million implies that the company anticipates that its revenue growth would have further moderated to +13.1% in Q4 2022.

At the company’s Q3 2022 earnings briefing on November 22, 2022, TDCX acknowledged that there is “a bleaker outlook” considering “layoffs that we’ve heard from a number of new economy clients.”

Profitability And Free Cash Flow Expectations

As per S&P Capital IQ’s consensus financial data, TDCX’s EBITDA margin is projected to contract by -90 basis points from 29.4% in fiscal 2022 to 28.5% for FY 2023. The sell-side analysts also see TDCX’s EBIT margin declining by -0.7 percentage points from 23.0% to 22.3% during the same time period. As mentioned in an earlier section of the article, the market’s consensus also points to an expected -11.2% decrease in free cash flow for TDCX this year.

Notably, adjusted EBITDA margin for TDCX had contracted by -3.70 percentage points to 31.8% in the recent Q3 2022. Looking ahead, TDCX’s operating profitability and free cash flow generation are likely to be weaker for FY 2023.

TDCX revealed at its most recent quarterly investor call that it had “instituted compensation adjustments in response to rising talent competition” and saw an increase in “operating expenses to cope with business volume expansion demand.” It is inevitable that TDCX has to invest to support future growth, but this will naturally come at the expense of lower operating profit margins and weaker free cash flow in the very near term.

Valuations Are Fair

TDCX’s shares are currently fairly valued after its recent share price outperformance (highlighted at the beginning of this article), in my opinion.

Peer Valuation Comparison For TDCX

Stock	Consensus Forward Next Twelve Months’ Normalized P/E Multiple	Consensus Forward Next Twelve Months’ EV/EBITDA Multiple	Consensus Forward Fiscal 2023 EBITDA Margin	Consensus Forward Fiscal 2023 EBITDA Growth Rate
TDCX	19.0	10.3	28.5%	+13.5%
Teleperformance SE (OTCPK:TLPFF) (OTCPK:TLPFY) [TEP:FP]	17.7	10.1	23.3%	+9.5%
TaskUs, Inc. (TASK)	15.0	9.6	21.3%	+6.6%
Concentrix Corporation (CNXC)	12.7	9.1	16.5%	+9.0%

Click to enlarge

Source: S&P Capital IQ

As per the peer valuation comparison table presented above, TDCX is expected to achieve a higher EBITDA margin and stronger EBITDA growth than its peers in 2023. But the positives have already been priced in, as TDCX trades at a premium over its peers in terms of EV/EBITDA and P/E multiples. Also, TDCX’s current P/E and EV/EBITDA valuation metrics are close to six month historical highs as per S&P Capital IQ’s data.

Concluding Thoughts

A Hold investment rating for TDCX’s stock is justified. TDCX’s current valuations are fair, and the company’s 2023 outlook is lackluster.