22 July 2016
1QFY17 Results Update | Sector: Consumer
ITC
Buy
BSE SENSEX
27,711
S&P CNX
8,510
CMP: INR251
TP: INR300(+20%)
Motilal Oswal values your support in
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Cig volume surprise on the upside; Worst seems behind
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USDb)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
Avg Val, INRm
Free float (%)
ITC IN
12070.81
3025 / 46.3
2259/178
2/8/22
2595
100
Financials & Valuations (INR b)
2016 2017E 2018E
Y/E Mar
Net Sales
362.2 395.8 446.3
EBITDA
137.2 153.6 177.0
NP
93.1 109.8 127.0
EPS (INR)
7.7
9.1
10.5
EPS Gr. (%)
-
17.9
15.6
BV/Sh. (INR)
27.3
31.9
36.7
RoE (%)
29.3
30.8
30.7
RoCE (%)
27.8
29.6
30.0
P/E (x)
32.5
27.6
23.8
P/BV (x)
9.2
7.9
6.8
EV/EBITDA (x)
20.6
18.3
15.6
Div. Yield
2.7
2.3
2.7
Estimate change
TP change
Rating change
Quarterly Performance
Y/E March
Cigarette Vol Gr (%)
Net Sales
YoY Change (%)
Total Exp
EBITDA
Growth (%)
Margins (%)
Depreciation
Interest
Other Income
PBT
Tax
Rate (%)
Adj PAT
E: MOSL Estimates
1Q
-17.0
91,600
59,078
32,522
35.5
2,576
105
3,565
33,407
11,746
35.2
21,661
+7%
ITC’s 1QFY17 operating performance
was in line with estimates. Net revenues
(Ind AS) increased 9.8% YoY (est. 10%) to INR 100.5b. EBITDA margin decline
stood at 40bps over a very high base in 1QFY16 (vs. our estimate of 100bps
decline) while PAT before other comprehensive income (Ind AS) grew 10.1%
YoY (est. 10%) to INR 23.8b. Absolute Sales, EBITDA and PAT numbers differ
from our estimates due to IND AS adjustments.
We reckon cigarette volumes were up 3% YoY
(best numbers since 4QFY13
and better than our expectation of 1% increase) aided by higher growth in the
sub 65mm segment (now well over 20% share in overall volumes in our view),
benign base (1QFY16 had reported 17% volume decline) and lower price
increases off late. Cigarette revenues and EBIT posted 8.4% and 8% YoY growth
respectively on a like to like basis with 50bps expansion of Cig EBIT margin
(despite mix impact YoY). Cigarette volumes had been impacted over the past
3 years due to consecutive excise duty/VAT increases and regulatory
headwinds but the worst impact in terms of volume now seems to be over.
Non-Cigarette FMCG business posted 9.6% sales growth
which is creditable in
a weak operating environment. Segment reported EBIT loss of INR45m was
worse than our expectations of a marginal profit but was better than the 80
mn EBIT loss in 1QFY16. Agri business revenues increased over 20% led by
wheat and leaf tobacco sales while margin dipped 160bps YoY to 9.7%.
Maintain BUY; Raise TP:
We have kept our estimates largely unchanged for
FY17/18E. At 23.8x FY18E, ITC trades at significant discount to the sector
average. Volume growth outlook for the crucial Cigarette segment (86% of
FY16 EBIT) seems to be recovering over the past two quarters and we believe
worst is behind for Cigarettes. Consequently we raise our target P/E to 27x
June 2018 (in line with 5 year average multiple) and maintain
Buy
with a
revised target price of INR 300 (INR 280 earlier).
0.26
(INR Million)
FY16
1QE
1.0
94,465
10.0
58,165
36,300
7.2
38.4
2,840
110
3,308
36,658
11,730
32.0
24,927
Var.
FY16
2Q
3Q
-14.0
-5.0
89,042 91,767
-1.3
2.6
53,441 55,715
35,601 36,052
2.0
4.1
40.0
39.3
2,588 2,625
103
161
3,992 6,779
36,902 40,045
12,589 13,517
34.1
33.8
24,313 26,528
4Q
0.0
97,567
61,483
36,084
37.0
2,543
123
3,712
37,131
13,342
35.9
23,789
1Q
3.0
100,540
9.8
65,278
35,262
8.4
35.1
2,613
101
4,205
36,754
12,907
35.1
23,847
FY17
FY16
FY17E
2QE
3QE
4QE
2.0
-3.0
-5.0
-9.0
-1.0
97,056 97,273 104,939 365,827 399,809
9.0
6.0
7.6
0.2
9.3
57,766 58,280 64,875 228,647 246,199
39,290 38,993 40,064 137,179 153,610
10.4
8.2
11.0
1.4
12.0
40.5
40.1
38.2
37.5
38.4
3,106 3,150
3,315 10,319 12,184
186
195
197
491
678
4,591 7,118
4,826 17,693 20,740
40,590 42,766 41,378 144,061 161,488
12,989 13,258 12,523 50,949 51,676
32.0
31.0
30.3
35.4
32.0
27,601 29,509 28,856 93,113 109,812
6.4%
-2.9%
0.3%
-4.3%
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Krishnan Sambamoorthy
(Krishnan.Sambamoorthy@MotilalOswal.com); +91 22 6129 1545
Vishal Punmiya
(Vishal.Punmiya@MotilalOswal.com); +91 22 6129 1547

ITC
Cigarettes drive better than expected sales growth
ITC’s 1QFY17 operating performance
was in line with estimates. Net revenues
(Ind AS) increased 9.8% YoY (est. 10%) to INR 100.5b. EBITDA Margin decline
stood at 40 bps over a very high base in 1QFY16 compared to the 100
bpsdecline that we were expecting while PAT before other comprehensive
income (Ind AS) grew 10.1% YoY (est. 10%) to INR 23.8b.
Cigarette volumes up 3%; Cig EBIT margin grew 50bps YoY
Cigarette volumes were up 3% YoY
(est. 1% YoY)
aided by higher growth in the
below 65mm segment
(segment now well over 20% share in the overall
volumes),
benign base
(1QFY16 reported 17% volume decline)
and lower price
increases off late.
Cig. revenue and EBIT posted 8.4% and 8% YoY growth resp on a like to with
50bps expansion of Cig EBIT margin (despite mix impact YoY). The focus on
higher end DSFT products has meant that price erosion in mix is not too adverse.
EBITDA margin percentage is the same as the > 65 mm products for DSFT but
absolute EBITDA contribution per stick is lower.
Cig. volumes had been impacted over the past 3 years due to consecutive excise
duty/VAT increases and regulatory headwinds but the worst impact in terms of
volume now seems to be over.
Given the disruption in supply chain during the quarter due to compliance with
the new packaging norms requiring 85% warning size on the package, we
believe that the volume growth number is quite healthy and indicates gradual
recovery.
Cigarette companies have appealed against the 85% packaging norm and a
decision on this is expected from the Karnataka high court by the end of this
month or early August. While all companies are complying with the new norms
requiring warming at 85% of pack size (a) these are much higher than the norms
in the rest of the world; and (b) any relief from the court will be a significant
positive as it leaves more space in the pack for branding.
Having said that the company had a favourable base of negative 17% cigarette
volumes in the base quarter. Advantage of favourable base extends to the next
couple of quarters as well because 2QFY16 and 3QFY16 had witnessed 14%
cigarette volume decline and 5% cigarette volume decline respectively according
to our calculations.
We believe that if the gradual volume recovery persists then pricing confidence
will also come back possibly leading to more price increases towards 3QFY17
ahead of the national and state budgets.
In our reckoning given the weak environment as well as significant size of the
Other FMCG business in terms of sales for them to report double digit sales
growth in this segment is creditable. Segment reported EBIT loss of INR45m was
worse than our expectations of a marginal profit but was better than the 80 mn
EBIT loss in 1QFY16. Losses persist due to gestation costs of new categories like
juices, dairy, gums and health & hygiene.
Noodles sales have recovered, Atta continues to do well off a high base and
finger snacks (Bingo) is doing well. In biscuits creams the creams segment of the
market is struggling for growth in recent quarters and since ITC has a
2
FMCG - Others: Healthy performance despite multiple headwinds
22 July 2016

ITC
disproportionately large presence in that category in that segment compared to
other players its growth is subdued. What’s doing very well for ITC is
Mom’s
Magic
cookies. While it is still early days for
Mom’s magic,
(launched less than
two years ago) it has made peers sit up and take notice which is creditable in
our view.
The company has rolled out ghee into eastern markets as well in addition to the
initial launch in South India earlier.
Agri segment revenue growth was aided by wheat and leaf tobacco sales grew
26.5%. However segment margin declined by 160bps YoY to 8.5%.
Agri business: Healthy 20% plus sales growth
Hotels: Weak pricing scenario prevails
Hotel segment revenues were flat at INR2.9b impacted by weak pricing scenario
due to excessive room inventory in key domestic markets, and weak macro
environment both in India and major source markets.
Segment reported EBIT of INR12m compared to a loss of INR72 mn in the base
quarter 1QFY16.
Paper: Slight decline in revenues and EBIT
Paper and Paperboard business sales grew 3.0% YoY to INR12.4b impacted by
the slowdown in the FMCG and Cigarette industry. Segment EBIT grew 6.7% YoY
to INR2.4b as EBIT margin expanded 50bps YoY to 16.4%.
Paper & Paper board business is economy linked. Unless there is a big pickup in
client sectors like FMCG and Pharma there is unlikely to be a sharp recovery in
the segment.
Valuation and view
We have kept our estimates largely unchanged for FY17/18E. At 23.8x FY18E,
ITC trades at significant discount to the sector average. Volume growth outlook
for the crucial Cigarette segment (86% of FY16 EBIT) seems to be recovering
over the past two quarters and we believe worst is behind for Cigarettes.
Consequently we raise our target P/E to 27x June 2018 (in line with 5 year
average multiple) and maintain BUY with a revised target price of INR 300 (INR
280 earlier).
Exhibit 2: Falling P/E premium vs. Sensex
150
100
26.8
50
0
-50
39.9
58.4
ITC PE Relative to Sensex PE (%)
LPA (%)
Exhibit 1: ITC P/E (x): Valuations near long term averages
39.0
31.0
23.0
15.0
7.0
23.1
12.1
PE (x)
Peak(x)
Avg(x)
30.9
Min(x)
Source: Bloomberg, Company, MOSL
Source: Bloomberg, Company, MOSL
22 July 2016
3

ITC
Exhibit 1: Valuation Matrix of coverage universe
Company
Reco
Price
Mkt Cap EPS Growth YoY (%)
(INR)
(USD M) FY16 FY17E FY18E
Consumer
Asian Paints Neutral
Britannia
Buy
Colgate
Buy
Dabur*
Neutral
Emami*
Buy
Godrej
Neutral
GSK
Buy
Hind. Unilever Neutral
ITC
Buy
Jyothy Labs Buy
Marico*
Neutral
Nestle
Neutral
Page
Buy
Pidilite Inds. Buy
P&G Hygiene Buy
Radico
Buy
United Spirits Buy
Retail
Jubilant
Buy
Shopper's
Neutral
Titan
Neutral
1,040
2,817
960
304
1,123
1,612
6,428
910
251
290
278
6,834
13,570
729
6,322
91
2,376
1,143
366
408
14,853
5,030
3,888
7,963
3,795
8,171
4,024
29,312
45,038
781
5,331
9,808
2,253
5,562
3,055
180
5,139
1,115
447
5,394
25.0
41.9
6.9
17.5
16.7
26.1
17.7
12.9
-
24.2
23.7
-7.3
21.0
46.6
19.8
-2.6
LP
-6.0
20.3
-11.7
15.8
21.6
8.5
15.5
15.5
22.3
9.7
7.1
17.9
-6.7
14.6
-5.7
25.0
13.9
12.0
14.7
88.9
54.0
54.3
17.0
11.3
15.2
21.4
13.8
19.5
15.1
14.7
12.8
15.6
12.4
16.6
20.5
31.3
17.4
19.7
21.0
49.9
46.1
45.4
15.3
P/E (x)
FY16 FY17E FY18E
56.1
41.6
43.7
42.6
45.0
47.9
39.4
47.8
32.5
33.2
50.5
57.0
63.8
49.1
49.5
14.1
109.4
71.7
62.2
49.9
48.4
34.2
40.3
36.9
39.0
39.2
35.9
44.6
27.6
35.6
44.1
60.4
51.0
43.1
44.2
12.3
57.9
46.6
40.3
42.6
43.5
29.7
33.2
32.4
32.6
34.1
31.3
39.6
23.8
31.7
37.8
50.2
38.9
36.7
36.9
10.2
38.6
31.9
27.7
37.0
EV/EBITDA (x)
RoE (%) Div.
FY16 FY17E FY18E FY16
FY16
37.5
28.3
27.8
34.5
38.2
36.5
29.1
33.4
20.6
25.6
33.5
40.2
39.7
30.9
33.1
10.0
36.3
26.7
14.6
40.1
32.4
23.6
24.3
29.6
31.1
29.0
26.2
31.0
18.3
22.7
29.6
34.8
32.3
26.4
28.4
8.7
31.5
19.4
12.1
31.3
28.9
19.5
20.0
26.2
26.1
26.0
21.9
27.5
15.6
20.1
25.3
28.8
25.0
22.4
23.0
7.4
23.5
14.3
9.5
27.0
34.4
54.6
66.8
33.6
43.0
23.9
29.9
82.4
29.3
19.2
36.2
40.9
46.9
29.8
31.2
9.3
25.8
14.1
6.3
21.8
0.9
0.9
1.0
0.8
0.7
0.6
1.0
1.8
2.7
1.4
1.2
0.7
0.7
0.6
1.0
1.1
0.0
0.2
0.4
0.6
Note: For Nestle FY16 means CY15
Source: Company, MOSL
22 July 2016
4

ITC
Financials and valuations
Income Statement
Y/E March
Net Sales
Operational Income
Total Revenue
Change (%)
Total Expenditure
EBITDA
Change (%)
Margin (%)
Depreciation
Int. and Fin. Charges
Other Inc. - Recurring
Profit before Taxes
Change (%)
Margin (%)
Tax
Tax Rate (%)
Profit after Taxes
Change (%)
Margin (%)
Reported PAT
Balance Sheet
Y/E March
Share Capital
Reserves
Net Worth
Loans
Deferred Liability
Capital Employed
Gross Block
Less: Accum. Depn.
Net Fixed Assets
Capital WIP
Investments
Current
Non-current
Curr. Assets, L&A
Inventory
Account Receivables
Cash and Bank Balance
Others
Curr. Liab. and Prov.
Account Payables
Other Liabilities
Provisions
Net Current Assets
Application of Funds
E: MOSL Estimates
(INR Million)
2017E
2018E
395,826
446,272
3,983
4,382
399,809
450,654
9.3
12.7
246,199
273,667
153,610
176,987
12.0
15.2
38.8
39.7
12,184
13,434
678
628
20,740
23,796
161,488
186,721
12.1
15.6
40.8
41.8
46,832
54,149
32.0
32.0
109,812
126,970
17.9
15.6
27.7
28.5
109,812
126,970
(INR Million)
2017E
2018E
12,071
12,071
372,845
430,826
384,916
442,897
165
165
13,317
7,360
398,398
450,422
243,684
92,700
150,984
28,886
147,805
77,483
70,322
207,508
86,580
17,893
68,758
34,276
136,785
61,597
14,791
60,397
70,723
398,398
268,684
106,134
162,549
28,886
174,846
97,492
77,354
239,409
96,381
20,174
85,170
37,684
155,268
68,586
16,848
69,834
84,140
450,422
2011
211,676
2,914
214,590
16.7
140,467
74,123
17.1
35.0
6,560
679
5,798
72,682
20.8
34.3
22,804
31.4
49,876
22.6
23.6
49,876
2012
247,984
3,490
251,475
17.2
162,788
88,687
19.6
35.8
6,985
980
8,253
88,975
22.4
35.9
26,777
30.7
61,624
23.6
24.8
61,624
2013
296,056
2,957
299,013
18.9
192,543
106,470
20.1
36.0
7,956
1,059
9,387
106,842
20.1
36.1
29,348
30.6
74,184
20.4
25.1
74,184
2014
328,826
3,560
332,386
11.2
207,631
124,755
17.2
37.9
8,999
236
11,071
126,591
18.5
38.5
37,911
30.6
87,852
18.4
26.7
87,852
2015
360,832
4,242
365,074
9.8
230,128
134,946
8.2
37.4
9,617
785
15,431
139,975
10.6
38.8
40,210
31.4
96,077
9.4
26.6
96,077
2016
362,206
3,621
365,827
0.2
228,647
137,179
1.7
37.9
10,319
491
17,693
144,061
2.9
39.8
50,949
35.4
93,113
-3.1
25.7
93,113
2011
11,455
148,077
159,532
343
8,019
167,894
127,658
44,208
83,451
13,334
55,547
42,189
13,358
97,901
52,692
8,851
22,432
13,926
82,338
39,685
8,219
34,435
15,563
167,894
2012
11,728
176,191
187,919
119
8,727
196,765
138,033
48,197
89,837
23,923
63,166
43,633
19,533
112,957
56,378
9,824
28,189
18,565
93,117
46,989
10,945
35,183
19,840
196,765
2013
11,853
211,026
222,879
113
12,037
235,029
165,884
54,698
111,186
15,786
70,603
50,594
20,009
142,600
66,002
11,633
36,150
28,815
105,146
50,571
13,091
41,485
37,454
235,029
2014
11,930
250,690
262,620
155
12,970
275,745
181,756
62,269
119,487
23,598
88,234
63,113
25,122
160,975
73,595
21,654
32,894
32,832
116,549
54,498
14,332
47,719
44,426
275,745
2015
12,023
295,334
307,357
143
16,316
323,816
209,908
72,136
137,771
25,155
84,055
59,638
24,416
194,976
78,368
17,224
75,886
23,498
118,140
53,817
14,226
50,097
76,835
323,816
2016
12,071
317,219
329,290
165
18,484
347,939
218,684
80,516
138,168
28,886
128,542
64,613
63,929
199,588
85,198
16,864
65,640
31,887
147,246
60,523
18,038
68,685
52,343
347,939
22 July 2016
5

ITC
Financials and valuations
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
BV/Share
DPS
Payout %
Valuation (x)
P/E
Cash P/E
EV/Sales
EV/EBITDA
P/BV
Dividend Yield (%)
Return Ratios (%)
RoE
RoCE
RoIC
Working Capital Ratios
Debtor (Days)
Asset Turnover (x)
Leverage Ratio
Debt/Equity (x)
Cash Flow Statement
Y/E March
OP/(loss) before Tax
Int./Div. Received
Depreciation and Amort.
Interest Paid
Direct Taxes Paid
Incr in WC
CF from Operations
Extraordinary Items
Incr Decr in FA
Free Cash Flow
Pur of Investments
CF from Invest.
Issue of shares
Incr in Debt
Interest Income
Interest Paid
Dividend Paid
Others
CF from Fin. Activity
Incr of Cash
Add: Opening Balance
Closing Balance
E: MOSL Estimates
2011
4.4
4.9
13.9
3.5
80.2
2012
5.3
5.9
16.0
3.5
66.4
2013
6.3
6.9
18.8
4.1
65.4
2014
7.4
8.1
22.0
4.7
63.5
2015
8.0
8.8
25.6
5.0
62.8
2016
7.7
8.6
27.3
6.8
88.4
2017E
9.1
10.1
31.9
5.9
64.4
2018E
10.5
11.6
36.7
6.8
64.4
57.6
50.9
13.9
39.8
18.0
1.4
47.7
42.8
11.8
33.1
15.6
1.4
40.0
36.2
9.9
27.4
13.3
1.6
34.0
30.9
8.8
23.3
11.4
1.9
31.4
28.5
7.9
21.2
9.8
2.0
32.5
29.3
7.8
20.6
9.2
2.7
27.6
24.8
7.1
18.3
7.9
2.3
23.8
21.5
6.2
15.6
6.8
2.7
33.2
31.8
63.2
15
1.3
35.5
34.2
71.6
14
1.3
36.1
34.7
70.5
13
1.3
36.2
34.5
66.0
18
1.2
33.7
32.2
63.8
20
1.1
29.3
27.8
62.2
17
1.0
30.8
29.6
69.2
16
1.0
30.7
30.0
70.7
16
1.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
2011
72,682
5,798
6,560
679
22,806
4,522
47,402
0
11,224
36,178
-1,722
-9,502
5,118
183
5,798
679
38,182
1,031
-26,731
11,170
11,263
22,432
2012
88,975
8,253
6,985
980
27,352
-1,480
65,811
1
20,964
44,847
7,619
-28,582
7,570
-224
8,253
980
34,435
-11,656
-31,472
5,757
22,432
28,189
2013
106,842
9,387
7,956
1,059
32,658
9,654
65,612
2
19,714
45,898
7,437
-27,149
9,140
-6
9,387
1,059
35,183
-12,781
-30,503
7,961
28,189
36,150
2014
126,591
11,071
8,999
236
38,739
10,228
77,217
3
23,684
53,532
17,631
-41,313
6,859
43
11,071
236
41,485
-15,413
-39,160
-3,256
36,150
32,894
2015
139,975
15,431
9,617
785
43,898
-10,583
101,381
0
29,709
71,673
-4,180
-25,529
9,726
-12
15,431
785
47,719
-9,501
-32,860
42,992
32,894
75,886
2016
144,061
17,693
10,319
491
50,949
-14,246
102,416
0
12,507
89,909
44,488
-56,995
5,285
21
17,693
491
50,097
-28,079
-55,668
-10,246
75,886
65,640
(INR Million)
2017E
2018E
161,488
186,721
20,740
23,796
12,184
13,434
678
628
51,676
59,751
15,262
-2,995
86,672
120,231
0
25,000
61,672
19,263
-44,263
0
0
20,740
678
68,401
9,048
-39,291
3,118
65,640
68,758
0
25,000
95,231
27,041
-52,041
0
0
23,796
628
60,397
-14,549
-51,777
16,412
68,758
85,170
22 July 2016
6

ITC
Corporate profile
ITC is an associate of BAT (British American
Tobacco) controls more than 2/3rd of the cigarette
market in India. ITC has emerged as a diversified
conglomerate
with
leading
presence
in
Paperboards, Hotels and Processed foods. E-
Choupal, the agri rural initiative of the company has
been widely appreciated for its foresight in
harnessing the potential in the rural market.
Company description
Exhibit 1: Sensex rebased
Source: MOSL/Bloomberg
Exhibit 2: Shareholding pattern (%)
Mar-16
Promoter
DII
FII
Others
0.0
35.2
20.7
44.2
Dec-15
0.0
35.2
21.0
43.8
Mar-15
0.0
34.8
21.0
44.3
Source: Capitaline
Exhibit 3: Top holders
Holder Name
Tobaco Manufacturing (India) Ltd
Life insurance Corporation of India
Specified Undertaking of the Unit Trust of
India
Myddleton Investment Company Ltd
The New India Assurance Company Ltd
% Holding
24.7
14.4
11.2
4.0
1.9
Source: Capitaline
Note: FII Includes depository receipts
Exhibit 4: Top management
Name
Yogesh Chander Deveshwar
Biswa Behari Chatterjee
Designation
Chairman
Executive VP & CS
Exhibit 5: Directors
Name
Anil Baijal
Krishnamoorthy Vaidyanath
Pillappakkam
Bahukutumbi
Ramanujam
S B Mainak
S S H Rehman
Nakul Anand
Sanjiv Puri
Name
Arun Duggal
Meera Shankar
R E Lerwill
S Banerjee
Sunil Behari Mathur
Rajiv Tandon
A V Girija Kumar
Source: Capitaline
*Independent
Exhibit 6: Auditors
Name
Deloitte Haskins & Sells
Shome & Banerjee
Type
Statutory
Cost Auditor
Exhibit 7: MOSL forecast v/s consensus
EPS
(INR)
FY17
FY18
MOSL
forecast
9.1
10.5
Consensus
forecast
9.2
10.3
Variation (%)
-1.5
2.1
Source: Bloomberg
Source: Capitaline
22 July 2016
7

PRODUCT GALLERY
Our recent reports on ITC
Our recent reports on Consumer sector
Our recent reports on other Consumer companies

ITC
NOTES
22 July 2016
9

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