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Result Update

April 26, 2018


Rating matrix
Rating : Buy Sterlite Technologies (STETEC) | 343
Target : | 440
Target Period
Potential Upside
:
:
12 months
28%
Export demand drives growth…
 Revenues came in at | 846.6 crore, up 19.7% YoY, slightly below our
What’s changed?
expectations of | 866.6 crore (22.6% YoY growth). The key driver of
Target Unchanged
EPS FY19E Changed from | 10.3 to | 10.3
revenue growth continued to be exports, which formed ~60% of the
EPS FY20E Unchanged
topline during the quarter, which grew ~97% YoY
Rating Unchanged  EBITDA came in at | 220.3 crore (I-direct estimate: | 208.0 crore), with
EBITDA margin of 26%, much ahead of our estimate of 24%. EBITDA
Quarterly performance growth was due to increase in contribution of product business
Q4FY18 Q4FY17 YoY (%) Q3FY18 QoQ (%)  PAT came in at | 112.4 crore against our expectation of | 89.3 crore,
Revenue 846.6 707.2 19.7 835.2 1.4
aided by a beat at the EBITDA level and lower than anticipated
EBITDA 220.3 162.4 35.6 201.7 9.2
EBITDA (%) 26.0 23.0 305 bps 24.1 188 bps
effective tax rate of 22.7% vs. our estimate of 30%
PAT 112.4 63.7 76.6 90.1 24.8 Strong traction from global demand

Key financials Sterlite Technologies (STL) continues to ride on strong global demand of
| Crore FY17 FY18 FY19E FY20E
OF/OFC as the telcos build on their 4G network. We highlight that over the
Net Sales 2,594 3,205 4,182 5,551 medium to long term, other growth catalyst such as 5G, IOT and domestic
EBITDA 519 749 928 1,249 government led initiatives like Digital India, Bharat Net (Phase II) continue
Net Profit 201 334 410 583 to provide strong growth visibility. The company reiterated its stance of
EPS (|) 5.1 8.4 10.3 14.7 OF capacity expansion to 50 mn fibre km by June, 2019, from 30 mn fibre
km currently. The company also informed that it is progressing well to
Valuation summary achieve phased capacity ramp-up with CY18 exit capacity at 40 mn fibre
FY17 FY18 FY19E FY20E km. We note currently the growth demand is driven by global demand
P/E 67.7 40.8 33.2 23.4 and Indian leg of growth would further boost the company as telcos step
Target P/E 86.9 52.4 42.7 30.0
up network expansion post industry consolidation. Consequently, we
EV / EBITDA 28.1 19.3 16.2 12.1
expect revenues from product segments to grow at 24.6% CAGR in FY18-
P/BV 15.5 12.0 9.3 7.0
RoNW
20E to | 3730 crore in FY20E, with incremental revenues driven by
22.9 29.6 28.1 29.9
RoCE 16.1 21.6 22.3 26.1 expanded capacity.
Wins Navy order worth | 3500 crore…
Stock data
STL’s software, services and solution business include its offerings like
Particular Amount
Market Capitalization (| crore) 13,624.4
OSS/BSS and System & Network Integration (SI/NI), respectively. The
Total Debt (FY17) (| crore) 1,130.4
company won a | 3,500 crore (75% SI/NI executable over two years)
Cash (FY17) (| crore) 137.4 advance purchase order to design, build and manage the Indian Navy’s
EV (| crore) 14,471.8 communications network. The order is expected to be executed from
52 week H/L (| ) 206 / 73 H2FY19 onwards, boosting services revenues, albeit at lower margins.
Equity capital (| crore) 79.7 We build in overall FY18-20E services revenue CAGR of 59.3% to | 1500
Face value (|) 2.0 crore. Going ahead, opportunities from network for spectrum (NFS)
Bharat Net (phase II) (expected to witness bidding in traction in FY19) and
Research Analysts Smart Cities are likely to drive the services/solutions business visibility.
Bhupendra Tiwary Strong demand funnel; maintain BUY
bhupendra.tiwary@icicisecurities.com We reiterate that the demand funnel for STL, both on product (global 4G
network expansion and 5G foray) and services (SI/NI opportunities from
Sameer Pardikar
NFS/ Bharat Net etc), looks strong. We also highlight that OF capacity
sameer.pardikar@icicisecurities.com
expansion announcement would bring in additional revenue opportunity
of ~| 1000 crore at the full capacity (from FY20 onwards), which would, in
turn, be margin accretive. The ramp up in OFC capacity and services
revenues from Navy order, would further boost the growth trajectory.
Given the robust growth potential (topline, earnings CAGR of 31.2%,
32.1%, respectively, in FY18-20E), we maintain our BUY rating on the
stock. We value the company at 30x FY20E P/E to arrive at a target price
of | 440.

ICICI Securities Ltd | Retail Equity Research


Variance analysis
Q4FY18 Q4FY18E Q4FY17 Q3FY18 YoY (%) QoQ (%) Comments
Revenue 846.6 866.6 707.2 835.2 19.7 1.4 The topline growth was largely driven by strong exports growth momentum
wherein export revenues (60% of the topline) grew 70% YoY

Other Income 17.2 7.0 3.1 6.7 457.5 155.1


Cost of raw material and components consumed 372.3 346.7 406.7 350.2 -8.5 6.3
Purchase of traded goods 9.2 11.3 0.0 13.7 NA NA
Employee Expenses 94.6 86.7 69.1 88.9 36.8 6.4
(Increase) / decrease in inventories of finished
-55.6goods 0.0 -120.6 -28.7 -53.9 93.6
Other Expenses 205.8 214.1 189.5 209.5 8.6 -1.8

EBITDA 220.3 208.0 162.4 201.7 35.6 9.2


EBITDA Margin (%) 26.0 24.0 23.0 24.1 305 bps 188 bps Superior margins are a function of higher growth in the margin accretive
product segment
Depreciation 52.5 47.7 44.5 44.8 18.0 17.2
Interest 25.3 25.1 24.3 25.7 4.0 -1.8

Total Tax 36.2 42.6 27.9 38.7 29.7 -6.4


PAT 112.4 89.3 63.7 90.1 76.6 24.8 The bottomline growth was driven by EBITDA margins expansion coupled
with a healthy topline show

Source: Company, ICICI Direct Research

Change in estimates
FY19E FY20E
(| Crore) Old New % Change Old New % Change Comments
Revenue 4,086.6 4,181.9 2.3 5,252.0 5,550.8 5.7 Raised our topline estimates to incorporate execution from Navy SI/NI order

EBITDA 918.4 928.0 1.1 1,208.0 1,248.9 3.4


EBITDA Margin (%) 22.5 22.2 -28 bps 23.0 22.5 -50 bps Lower our margins estimates to incorporate Navy order execution, which has
lower margin profile
PAT 411.9 410.1 -0.4 584.5 583.5 -0.2
EPS (|) 10.3 10.3 -0.4 14.7 14.7 -0.2

Source: Company, ICICI Direct Research

ICICI Securities Ltd | Retail Equity Research Page 2


Revenue to grow at 31.2% CAGR in FY18-20E, led by strong global
OF/OFC demand

Exhibit 1: Segmental revenues breakup

5,500 285

4,400 1,500
259
3,300 1,050

(| Crore)
235
591
199
2,200 115 341
363 3,730
2,403 2,837
1,100 1,813 2,024

0
FY16 FY17 FY18P FY19E FY20E

Products Services Software (Elitecore) Others

Source: Company, ICICI Direct Research

Navy order to dilute margin over FY19 and FY20…


We lower our margin estimates as we build in execution of Navy order
(margin profile of 12-14%) from H2FY19 onwards. We expect margins of
22.2% and 22.5% in FY19E and FY20E, respectively, vs. 23.4% in FY18.
Exhibit 2: EBITDA and EBITDA margin trends

1,400.0 1,248.9 24.0


1,200.0 23.0
1,000.0 928.0
22.0
749.3
800.0
(| Crore)

21.0

(%)
600.0 518.9
459.2
20.0
400.0
200.0 19.0

0.0 18.0
FY16 FY17E FY18 FY19E FY20E

EBITDA EBITDA Margin

Source: ICICI Direct Research

ICICI Securities Ltd | Retail Equity Research Page 3


Other Takeaways:
 Export pie continues to rise, deepening European market
presence: The revenue from exports grew handsomely by 81%
YoY to | 1,735 crore in FY18 while exports now form 54% of the
revenue pie, up from 37% in FY17. The revenue contribution is
skewed towards international, especially the European region,
which now contributes to 27% of revenues in FY18, up from 11%
in FY17. As a result, domestic market contribution reduced to
46% in FY18, compared to 63% in FY17
 Order book of | 5223 crore as on FY18: The company has an
order book of | 5,223 crore as of FY18, out of which | 4,095 crore
order book is from product side while rest | 1,128 crore is from
services and software side. The product pie in the order book has
been rising and now forms 78% of the pie, up from 51% in FY17
 Navy order: The company received | 3,500 crore advanced
purchase order (not yet included in order book) to design, build
and manage Indian Navy’s communication network. Also, 75% of
this order is of system integration and is executable in the next 24
months while rest of the order is of maintenance, which is
executable over next seven years. As per the management, the
margin profile of this order book is in the range of 12-14%. The
company expects to commence this order from H2FY19 onwards
 Superior margins in Q4 driven by operating leverage from
product segment capacity utilisation: EBITDA margin for the
quarter came in at 26%, aided by capacity utilisation of OF, OFC
and favourable mix towards products that is a high margin
business. The capacity utilisation in OF and OFC is at 100% and
70%, respectively
 Global fibre demand outlook remains robust, 5G remains key
catalyst: As per the management, global OFC consumption is a
function of evolution of next generation technologies while fibre
consumption is in the elevated mode with evolution of every next
generation technology. As per the management, fibre demand for
5G would be 2.5x to 5x compared to 4G from CY20 onwards. It
augurs well for an integrated player like Sterlite. The management
also expects benefits from demand-supply mismatch, which will
remain elevated in CY18
 Fund raising, merely enabling resolution: The board of directors
has approved raising of | 2000 crore each through non-
convertible debentures and equity. We highlight that the company
clarified that it is equipped to fund majority of its expansion from
international accruals. The approval is merely an annual exercise
that they have been doing
 Other highlights: The company has started getting orders for 2020
and is of the opinion that the demand scenario will continue to be
robust in 2020 as well. The management said that preform
demand supply situation will remain favourable in CY18, which
will help to sustain pricing. The company is on the roadmap to
generating $100 million profit in FY20

ICICI Securities Ltd | Retail Equity Research Page 4


Valuation
We reiterate that the demand funnel for STL, both on product (global 4G
network expansion and 5G foray) and services (SI/NI opportunities from
NFS/ Bharat Net etc), looks strong. We also highlight that OF capacity
expansion announcement would bring in additional revenue opportunity
of ~| 1000 crore at the full capacity (from FY20 onwards), which would, in
turn, be margin accretive. The ramp up in OFC capacity and services
revenues from Navy order would further boost the growth trajectory.
Given the robust growth potential (topline and earnings CAGR of 31.2%
and 32.1%, respectively, in FY18-20E), we maintain our BUY
recommendation on the stock. We value the company at 30x FY20E P/E
to arrive at target price of | 440.

Exhibit 3: Valuations
Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE
(| cr) (%) (|) (%) (x) (x) (%) (%)
FY17 2593.6 14.0 5.1 31.0 67.7 28.1 22.9 16.1
FY18 3205.5 23.6 8.4 66.0 40.8 19.3 29.6 21.6
FY19E 4181.9 30.5 10.3 22.7 33.2 16.2 28.1 22.3
FY20E 5550.8 32.7 14.7 42.3 23.4 12.1 29.9 26.1
Source: ICICI Direct Research

ICICI Securities Ltd | Retail Equity Research Page 5


Recommendation History vs. Consensus

390 100.0
360
330 90.0
300
270 80.0
240
(|)

210 70.0

(%)
180
150 60.0
120
90 50.0
60
30 40.0
Apr-15 Jun-15 Sep-15 Nov-15 Feb-16 Apr-16 Jun-16 Sep-16 Nov-16 Feb-17 Apr-17 Jul-17 Sep-17 Nov-17 Feb-18 Apr-18

Price Idirect target Consensus Target Mean % Consensus with BUY

Source: Bloomberg, Company, ICICI Direct Research

Top 10 Shareholders Shareholding Pattern


Rank Name Latest Filing Date % O/S Position (m) Change (m) (in %)
Position Mar-17 Jun-17 Sep-17 Dec-17 Mar-18
1 Twin Star Overseas, Ltd. 31-Mar-18 52.2 209.4 0.0 Promoter 54.49 54.31 54.24 54.24 54.03
2 Life Insurance Corporation of India 31-Mar-18 3.3 13.3 -3.8 FII 7.04 7.95 7.86 7.11 8.51
3 DSP BlackRock Investment Managers Pvt. Ltd. 31-Mar-18 2.8 11.2 0.0 DII 11.33 11.74 11.47 11.82 11.03
4 L&T Investment Management Limited 31-Mar-18 2.3 9.4 0.2 Others 27.14 26.00 26.43 26.83 26.43
5 Dimensional Fund Advisors, L.P. 28-Feb-18 1.3 5.2 0.7 w
6 Reliance Nippon Life Asset Management Limited 31-Mar-18 1.3 5.0 -0.4
7 Vedanta Resources PLC 31-Dec-17 1.2 4.8 0.0
8 Vedanta, Ltd. 31-Mar-18 1.2 4.8 4.8
9 The Vanguard Group, Inc. 31-Mar-18 0.7 2.8 2.8
10 Carnegie Fonder AB 28-Feb-18 0.5 2.2 -0.9

Source: Reuters, ICICI Direct Research

Recent Activity
Investor name Investor name
Buys Sells
Vedanta, Ltd. +22.85M +4.76M Life Insurance Corporation of India -18.20M -3.79M
The Vanguard Group, Inc. +13.27M +2.77M Fidelity Management & Research (Hong Kong) Limited -6.93M -1.26M
William Blair Investment Management, LLC +4.39M +0.80M Carnegie Fonder AB -4.68M -0.85M
Dimensional Fund Advisors, L.P. +4.10M +0.74M Reliance Nippon Life Asset Management Limited -1.72M -0.36M
Principal PNB Asset Management Company Ltd. +2.65M +0.48M Champlain Investment Partners, LLC -1.52M -0.27M

Source: Reuters, ICICI Direct Research

ICICI Securities Ltd | Retail Equity Research Page 6


Financial summary
Profit and loss statement | Crore Cash flow statement | Crore
(Year-end March) FY17 FY18 FY19E FY20E (Year-end March) FY17 FY18 FY19E FY20E
Total operating Income 2,593.6 3,205.5 4,181.9 5,550.8 Profit after Tax 201.4 334.3 410.1 583.5
Growth (%) 14.0 23.6 30.5 32.7 Add: Depreciation 159.2 182.2 196.5 266.4
Cost of raw materials 998.4 1,267.0 1,691.8 2,331.4 Add: Interest paid 122.9 103.8 124.7 120.8
Employee Expenses 290.3 350.2 408.6 527.3 (Inc)/dec in Current Assets -149.4 -89.2 -575.7 -647.1
Administrative Expenses 786.0 838.9 1,153.5 1,443.2 Inc/(dec) in CL and Provisions 117.0 256.4 36.0 261.3
Total Operating Expenditure 2,074.6 2,456.1 3,253.9 4,301.9 Others 0.0 0.0 0.0 0.0
EBITDA 518.9 749.3 928.0 1,248.9 CF from operating activities 451.2 787.6 191.6 584.9
Growth (%) 13.0 44.4 23.8 34.6 (Inc)/dec in Investments -41.9 0.0 0.0 0.0
Depreciation 159.2 182.2 196.5 266.4 (Inc)/dec in Fixed Assets -219.4 -525.0 -550.0 -450.0
Interest 122.9 103.8 124.7 120.8 Others -150.7 -4.6 -5.2 -6.0
Other Income 23.5 39.3 30.0 38.0 CF from investing activities -411.9 -529.6 -555.2 -456.0
Exceptional Items - 4.4 - - Issue/(Buy back) of Equity 0.6 0.0 0.0 0.0
PBT 260.2 498.2 636.8 899.7 Inc/Dec in Minority Interest 14.0 29.8 35.7 11.1
Minority Interest 16.3 29.8 35.7 46.3 Issue of Preference Shares 0.0 0.0 0.0 0.0
PAT from Associates (2.8) (0.9) - - Inc/(Dec) in loan funds 205.3 130.0 250.0 -
Total Tax 39.7 133.2 191.0 269.9 Interest paid (122.9) (103.8) (124.7) (120.8)
PAT 201.4 334.3 410.1 583.5 Others -76.6 -75.2 -89.3 -89.3
Growth (%) 31.0 66.0 22.7 42.3 CF from financing activities 20.4 -19.2 71.7 -199.0
EPS (|) 5.1 8.4 10.3 14.7 Net Cash flow 59.7 238.9 -291.9 -70.2
Opening Cash & cash equivalents 77.7 137.4 376.2 84.3
Source: Company, ICICI Direct Research
Closing Cash & cash equivalents 137.4 376.2 84.3 14.2
Source: Company, ICICI Direct Research

Balance sheet | Crore Key ratios


(Year-end March) FY17 FY18 FY19E FY20E (Year-end March) FY17 FY18 FY19E FY20E
Liabilities Per share data (|)
Equity Capital 79.7 79.7 79.7 79.7 EPS 5.1 8.4 10.3 14.7
Preference Share Capital 0.0 0.0 0.0 0.0 Cash EPS 9.1 13.0 15.2 21.3
Reserve and Surplus 800.4 1,059.5 1,380.4 1,874.6 BV 22.1 28.6 36.7 49.1
Total Shareholders funds 880.1 1,139.2 1,460.0 1,954.2 DPS 1.5 1.9 2.2 2.2
Total Debt 1,130.4 1,260.4 1,510.4 1,510.4 Cash Per Share 25.5 30.1 35.1 41.7
Others 371.6 401.4 437.1 448.2 Operating Ratios (%)
Total Liabilities 2,382.0 2,801.0 3,407.5 3,912.8 EBITDA Margin 20.0 23.4 22.2 22.5
EBIT Margin 13.9 17.7 17.5 17.7
Assets PAT Margin 7.8 10.5 9.8 10.5
Gross Block 2,329.7 2,554.7 2,579.7 3,920.6 Inventory days 46.9 30.0 45.0 45.0
Less: Acc Depreciation 1,016.9 1,199.2 1,395.7 1,662.1 Debtor days 97.3 97.0 95.0 95.0
Net Block 1,312.7 1,355.5 1,184.0 2,258.4 Creditor days 63.1 75.0 60.0 60.0
Capital WIP 65.9 365.9 890.9 0.0 Return Ratios (%)
Total Fixed Assets 1,378.6 1,721.4 2,074.9 2,258.4 RoE 22.9 29.6 28.1 29.9
Investments 49.1 49.1 49.1 49.1 RoCE 16.1 21.6 22.3 26.1
Inventory 333.5 263.5 515.6 684.4 RoIC 16.9 28.1 30.6 25.5
Debtors 691.2 851.9 1,088.4 1,444.7 Valuation Ratios (x)
Loans and Advances 7.1 8.8 11.4 15.2 P/E 67.7 40.8 33.2 23.4
Other Current Assets 280.2 277.0 361.4 479.7 EV / EBITDA 28.1 19.3 16.2 12.1
Cash 137.4 376.2 84.3 14.2 EV / Net Sales 5.6 4.5 3.6 2.7
Total Current Assets 1,449.3 1,777.4 2,061.2 2,638.2 Market Cap / Sales 5.3 4.3 3.3 2.5
Creditors 448.6 658.7 687.4 912.5 Price to Book Value 15.5 12.0 9.3 7.0
Provisions 62.6 92.0 96.0 127.4 Solvency Ratios
Other current liabilities 57.3 74.4 77.6 82.4 Debt/EBITDA 2.2 1.7 1.6 1.2
Total Current Liabilities 568.6 825.0 861.0 1,122.3 Net Debt / Equity 1.1 0.7 1.0 0.7
Net Current Assets 880.8 952.4 1,200.2 1,515.9 Current Ratio 2.6 1.9 2.5 2.5
Other non current assets 73.5 78.1 83.3 89.4 Quick Ratio 1.9 1.5 1.9 1.9
Application of Funds 2,382.0 2,801.0 3,407.5 3,912.8 Source: Company, ICICI Direct Research
Source: Company, ICICI Direct Research

ICICI Securities Ltd | Retail Equity Research Page 7


ICICI Direct coverage universe (Telecom)
CMP M Cap EPS (|) P/E (x) EV/EBITDA (x) RoCE (%) RoE (%)
Sector / Company (|) TP(|) Rating (| Cr) FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E
Bharti Airtel (BHAAIR) 411 480 Buy 164,293 9.5 2.5 3.4 43.2 162.2 120.8 7.6 8.7 8.7 8.4 5.7 5.9 7.4 2.6 2.1
Bharti Infratel (BHAINF) 322 330 Hold 59,502 14.9 13.5 13.3 21.7 23.9 24.2 9.7 8.6 9.2 20.1 21.1 19.8 17.7 14.7 15.4
Idea Cellular (IDECEL) 69 85 Hold 27,244 -1.1 -11.9 -12.0 NM NA NM 7.5 14.0 14.6 3.3 -3.4 -3.8 -1.6 -20.0 -25.3
Sterlite Tech. (STETEC) 343 440 Buy 13,658 5.1 7.7 10.3 67.8 44.6 33.2 28.2 19.9 16.1 16.1 21.0 22.8 22.9 27.5 28.7
Tata Comm. (TATCOM) 623 720 Buy 17,747 43.3 -6.5 12.4 14.4 NM 50.3 10.5 11.0 9.7 6.1 4.9 8.1 17.2 2.5 27.4
Source: Company, ICICI Direct Research

ICICI Securities Ltd | Retail Equity Research Page 8


RATING RATIONALE
ICICI Direct endeavours to provide objective opinions and recommendations. ICICI Direct assigns ratings to its
stocks according to their notional target price vs. current market price and then categorises them as Strong
Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is
defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;

Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com

ICICI Direct Research Desk,


ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai – 400 093
research@icicidirect.com

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ANALYST CERTIFICATION
We /I, Bhupendra Tiwary MBA, Sameer Pardikar MBA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately
reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this
report.

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ICICI Securities or its subsidiaries collectively or Research Analysts or their relatives do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month
preceding the publication of the research report.

Since associates of ICICI Securities are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject
company/companies mentioned in this report.

It is confirmed that Bhupendra Tiwary MBA, Sameer Pardikar, Research Analysts do not serve as an officer, director or employee of the companies mentioned in the report.

ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report.

Neither the Research Analysts nor ICICI Securities have been engaged in market making activity for the companies mentioned in the report.

We submit that no material disciplinary action has been taken on ICICI Securities by any Regulatory Authority impacting Equity Research Analysis activities.

This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution,
publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities
described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and
to observe such restriction.

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