Value proposition

TDCX stock: company with a good value proposition at a decent valuation

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Summary

I recommend a buy rating on TDCX (NYSE: TDCX). It provides a solution to a problem that a growing number of companies are facing, and TDCX should be able to continue to grow its profits by entering existing markets. customers and win new logos. I think TDCX should have no problem hitting consensus numbers over the next few years, and assuming TDCX market values ​​use the current multiple (16x forward earnings), it should generate an upside of around 27%.

Company presentation

TDCX is a provider of digital customer experience solutions, including omnichannel customer experience [CX] digital marketing and sales solutions, services, and content monitoring and moderation services. TDCX also offers customized digital customer experience solutions that can be used to manage sometimes complicated customer interactions.

TDCX’s service offerings are divided into three categories: (1) omnichannel CX solutions, (2) digital sales and marketing services, and (3) content monitoring and moderation services. TDCX’s primary focus is to help customers manage customer relationships by providing digital customer experience solutions such as after-sales service and customer support across ten verticals such as travel and hospitality, advertising and digital media and consumer products. Sales and digital marketing service offerings help clients market their products and services, and content monitoring and moderation service offerings help clients create a safe and secure online environment for social media platforms. by providing content monitoring and moderation services with a human touch. (TDCX F-1)

Attractive market with age-old tailwinds

Outsourcing refers to the practice of contracting with an external organization to manage normally internal functions such as information technology [IT] and business operations. This frees up resources, so the business can focus on what it does best: running the business. The three main types of outsourcing are ITO (IT outsourcing), KPO (Knowledge Process Outsourcing) and BSS (Business Support Services) is the last group, which includes TDCX. BSS involves outsourcing the operations and responsibilities of specific business functions (or processes), such as payroll, customer service, accounting, and data recording, to a third-party service provider.

Companies are turn to outsourcing in record numbers to help them succeed in today’s fierce marketplace. Even companies that have traditionally kept most of their operations in-house are beginning to see the benefits of outsourcing. Managing legacy systems internally is becoming increasingly difficult for businesses, so they are turning to outsourced service providers as partners to help them modernize their operations. Due to these factors, the BSS outsourcing market grew at a CAGR of 4.2% between 2016 and 2021, and future expansion is expected to be even faster at a CAGR of 4.9%.

TAM

TDCX F-1

I think companies are expanding the scope of business functions they outsource, especially when embarking on digital transformation initiatives, since it’s much faster, less burdensome on initial CAPEX and easier to deploy. Among the many initiatives, I expect CX to be one of the major growth drivers for the BSS market. Because today’s consumers expect unified service across all touchpoints, companies can no longer treat customer service as a series of independent tasks. The primary requirement for customer experience-centric innovations in digital transformation initiatives will be the development of a differentiated customer experience through the integration of channels and contextual responses. Companies like TDCX are revolutionizing business operations by enabling advanced technologies such as automation and analytics. Companies looking to outsource their CX operations will focus on players like TDCX who can help them create a unique customer experience through channel integration and contextual responses, such as using a chatbot or a Conversational AI and the use of analytics for prediction and AI.

The rise of the Internet and the new economy supports the growth of the industry

The BSS and CX industries have experienced growth over the past three to five years globally and regionally due to the proliferation of the Internet and the New Connected Economy (defined below). New consumer habits made possible by the ubiquity of the Internet and mobile access have propelled the new economy sector to new heights. People use their mobile devices for a wide variety of purposes, including but not limited to communicating, having fun, and gaining knowledge. They are increasingly shopping, planning trips and ordering meals online. As urbanization spreads around the world, I expect more people to be able to participate in the new economy due to the growing adoption of the Internet.

Industries that combine rapid growth with technological advancement are what the “new economy” refers to. New economy tech giants include Amazon (AMZN), Apple (AAPL), Google (GOOGL) (GOOG), Facebook (META), Tencent (OTCPK:TCEHY), Microsoft (MSFT) and Tesla (TSLA). To expand operations quickly as they focus on entering new markets (i.e. companies don’t need to waste time doing time-wasting things like hiring call center employees, finding an office for all those people, etc.) and evolving to provide new products and services, I believe new economy industries like digital advertising and e-commerce will increase their partnerships with BSS companies.

In addition, the new economy BSS outsourcing market is shift from low-complexity work to high value-added strategic services. Content management and moderation, advertising campaign management and other back-office support services are just a few examples of the growing trend of outsourcing these tasks to third-party vendors, as they offer superior service to much lower prices. Outsourcing is becoming increasingly popular as a means of expansion for new economy businesses, as service providers are better equipped to provide specialized services at lower prices. New economy companies can gain a competitive advantage through outsourcing because it allows them to maintain flexibility and scalability at a fraction of the cost of building in-house resources and capabilities. Indeed, the demand for outsourced CX services in the new economy is expected to increase threefold over the next few years.

TAM

TDCX F-1

Benefits of omnichannel and international footprint

BSS providers that are omnichannel and have a global presence have an edge over their competitors. To improve their interactions with their customers, TDCX offers integrated omnichannel and multimodal solutions. These channels include voice and email, as well as messaging and social media, AI-powered chatbots, and in-app interactions. At the heart of this is TDCX’s ability to integrate third-party technologies and platforms with in-house development to meet the unique needs of our customers’ operations. TDCX has ten different locations in Asia, Europe and Latin America. This gives him access to a wide range of skilled workers and allows us to communicate in English as well as important Asian languages ​​such as Mandarin, Thai, Korean, Malay (from Malaysia and Indonesia), Vietnamese and Japanese.

Evaluation

At the current share price of $10.51 and 145.8 million shares, the market capitalization is approximately $1.5 billion. I believe the current market price understates the true value of TDCX and is a good entry point for investors looking to buy the stock. Based on my model, I think TDCX will have sales of $650 million and net income of $121 million in FY23. This will be driven by teen sales growth and the increase net margin expansion to 19%, which will give it a market capitalization of $1.8 billion and a share price of $13.32 for FY23, representing an increase of 27%.

Hypotheses:

  1. Sales: Growth expectations will track consensus, slowing from the 30% high to the mid to 1990s average. I think some of the slowdown is likely due to current macroeconomic development, but long-term growth should still be quite healthy given the secular tailwinds that I expect TDCX to take advantage of.
  2. Net profit: Net margin expectations are in line with consensus, which should see a gradual increase over the next few years as the company reduces its fixed cost base and recovers to pre-crisis levels.
  3. Valuation: TDCX was trading at around 20x forward earnings before interest rates started to rise, but has now traded at 16x. My guess is that there will be no change in the multiples over the next few years assuming no change in the interest rate environment.

Evaluation

Norman capital

Risk

Competition

The global outsourced customer experience market is still relatively fragmented, with global service providers competing with smaller, specialized service providers located in different regional markets. Even though there are still a lot of mergers and acquisitions in the industry, the customer experience market is becoming more attractive to large service providers and smaller niche service providers with digital skills and unique automation. Indeed, business needs drive a wider range of service capabilities.

customer focus

Its top two customers, META and Airbnb (ABNB), accounted for 61.6% of FY21 revenue for TDCX, and the top five customers accounted for 84.4% of revenue. The potential loss of these types of customers poses a serious threat to TDCX’s bottom line.

Pressure on margins due to rising wage costs.

TDCX spends significant amounts on employee benefits. The rapid growth of the industry and the accompanying war for talent could lead to higher wages, which could hurt TDCX’s profit margin

Conclusion

TDCX may not have the best business in the world, compared to S&P (SPGI) and GOOGL, but it has a decent value proposition that solves a growing problem for its target customer base, which is a very large TAM . As the new economy continues to grow and occupy a large part of the global economy, TDCX stands to benefit and be able to increase sales and profits along the way. The current valuation serves as a decent entry point (at 16x forward earnings) for investors to buy this company.