10 February 2016
3QFY16 Results Update | Sector: Healthcare
BSE SENSEX
23,759
Bloomberg
Equity Shares (m)
M.Cap. (INR b)/(USDb)
52-Week Range (INR)
1, 6, 12 Rel.Per (%)
Avg Val,INRm
Free float (%)
S&P CNX
7,216
CIPLA IN
803.0
429/6.5
752/535
-9/-12/0
1233
63.2
Cipla
CMP: INR534
TP: INR600 (12%)
Neutral
Weak results; Margin recovery is key
Cipla’s 3Q revenues came in at INR31b (up 12% YoY) and were ~9% below our
estimates primarily due to flat domestic sales, partially offset by strong performance in
South Africa and other EMs. EBITDA at INR 4.5b (18%YoY decline) was ~35% below
estimates due to poor business mix, one offs and high R&D cost. PAT at INR 3.4b (5%
growth) was below our estimates due to weak sales and margins, partially offset by
lower tax rate (3% of PBT).
Sales growth to moderate in 2HFY16:
Domestic formulations sales were flat in 3Q
due to change in distribution policy. Excluding impact of distribution policy
changes, domestic business grew at ~11% YoY. Management expects this to
normalize in coming quarters. Export formulations grew 33% YoY to INR16.9b,
driven by strong growth in South Africa and other emerging markets. YTD SA
market grew 43% YoY in constant currency terms driven by ramp-up in private and
tender business. We expect revenue growth to pick-up in 4Q as domestic business
comes back on track and Pulmicort revenue gets reflected from 4Q onwards.
Margin drop attributed to one offs and high R&D:
EBITDA margin at 14.6%
(decline of >500bp YoY)– significantly below our estimates due to change in
business mix, higher distribution cost (250bp) in India, higher R&D cost in 3Q (up
200bp YoY) and ZAR depreciation (70bp). Going ahead, margin improvement due
to ramp-up of respiratory business and strong US business growth will get partially
offset by negative operating leverage in recently opened front-ends and higher
R&D cost due to increased product filings.
Earnings call takeaways:
a) Invagen acquisition to get completed by 4Q FY16; b)
Pulmicort sales to get reflected from 4Q onwards; c) Base business EBITDA margin
expected to be ~18 in near term; d) Tax rate for FY16E expected to be ~22-23%.
Valuation and view:
We maintain
Neutral
rating on the stock with TP of INR600 @
18x FY18E PER (vs INR710 @ 20x). We have cut our FY17/ 18E EPS by 3-4% as e
build in slower margin improvement.
Financials & Valuation (INR b)
Y/E Mar
Sales
EBITDA
Net Profit
EPS Gr. (%)
RoE (%)
P/E (x)
P/BV (x)
2016E 2017E 2018E
139.0 166.6 198.9
30.2
18.5
63.9
14.9
23.2
3.5
36.0
19.9
24.8
7.5
14.1
21.6
3.0
12.6
45.2
26.7
33.3
34.5
16.1
16.0
2.6
9.7
Adj. EPS (INR) 23.0
BV/Sh. (INR) 154.1 175.9 206.3
EV/EBITDA(x) 15.1
Estimate change
TP change
Rating change
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.
Kumar Saurabh
(Kumar.Saurabh@MotilalOswal.com); +91 22 3982 5584
Amey Chalke
(amey.chalke@motilaloswal.com); +91 22 39825423

Cipla
3Q Result Snapshot
Exhibit 1: Quarterly sales mix
Revenue split
India Form.
Exp. Form.
Exp. API
Total sales
3QFY15
11,990
12,690
1567
26,247
2Q FY16
12,620
18,740
2260
33,620
3QFY16
11,940
16,892
1,438
30,270
%YoY
-0.4
33.1
-8.2
15.3
%QoQ
-5.4
-9.9
-36.4
-10.0
FY15
48,250
54,200
6379
108,829
FY16E
51,145
76,192
8,401
%YoY
6.0
40.6
31.7
135,738
24.7
Source: Company, MOSL
Exhibit 2: Quarterly Profit and Loss statement
(INR m)
Total revenues
Other operating income
Total sales
Cost of revenues
Gross profit
Gross margin (%)
Staff cost
% of Total Revenues
Other expense
% of Total Revenues
EBITDA
EBITDA margin (%)
Depreciation
EBIT
Interest cost
Other income (net)
PBT
Income tax
Effective tax rate (%)
Reported Profit
Share of profits
Minority Interest
Adjusted Net Profit
3QFY15
26,247
1,408
27,655
9,898
17,757
64.2
5,055
18.3
7,164
25.9
5,538
20.0
1,216
4,322
447
407
4,282
944
22.1
3,337
6.3
65.2
3,279
2Q FY16
33,617
907
34,524
12,169
22,355
64.8
5,859
17.0
8,602
24.9
7,894
22.9
1,340
6,554
503
259
6,311
1812
28.7
4,499
-28.6
157.5
4,312
3QFY16
30,273
793
31,066
12,338
18,727
60.3
5,862
18.9
8,328
26.8
4,537
14.6
1,375
3,162
230
793
3,726
120
3.2
3,606
-35
139
3,432
%YoY
15.3
-43.7
12.3
24.7
5.5
(393)bp
16.0
59 bp
16.2
90 bp
-18.1
(542)bp
13.1
-26.8
-48.7
95.0
-13.0
-87.3
(1,884)bp
8.1
-655.6
113.5
4.7
%QoQ
-9.9
-12.6
-10.0
1.4
-16.2
(447)bp
0.1
190 bp
-3.2
189 bp
-42.5
(826)bp
2.6
-51.8
-54.3
205.9
-41.0
-93.4
(2,551)bp
-19.8
22.4
-11.6
-20.4
FY15
108,824
4,630
113,454
41,897
71,557
63.1
19,737
17.4
30,204
27.8
21,617
19.1
5,047
16,570
726
1,226
17,069
4000
23.4
13,069
-253
481.5
12,335
FY16E
135,738
3,286
139,024
50,049
88,976
64.0
23,773
17.1
35,034
25.8
30,168
21.7
5,437
24,732
1,681
1,870
24,921
5856
23.5
19,065
-100
480
%YoY
24.7
-29.0
22.5
19.5
24.3
93 bp
20.5
(30)bp
16.0
(194)bp
39.6
265 bp
7.7
49.3
131.5
52.6
46.0
46.4
6 bp
45.9
-60.5
-0.3
18,485
49.9
Source: Company, MOSL
10 February 2016
2

Cipla
Operating metrics
Exhibit 3: Key operating metrics
4QFY13 1QFY14
Revenue Mix (%)
India
Exports form
Exports API
Revenue Gr. (%)
India
Exports form
Exports API
As % of sales
Raw material
Staff cost
Other expenses
Tax Rate
Margins (%)
Gross Margins
EBITDA Margins
EBIT Margins
PAT margins
60.9
20.8
20.4
14.0
58.7
27.4
29.1
20.8
61.6
22.5
22.3
14.5
60.9
18.1
16.8
11.1
58.7
16.2
15.7
10.7
61.3
19.9
17.3
11.1
61.4
20.2
17.5
11.4
62.3
20.0
18.0
12.5
61.1
16.4
14.5
8.7
66.9
27.0
25.4
63.8
22.9
20.3
59.2
14.6
13.1
39.1
13.4
29.3
28.1
41.3
13.4
23.6
24.0
38.4
14.7
25.9
27.0
39.1
15.8
27.9
25.0
41.3
17.6
27.9
21.7
38.7
18.1
25.4
24.1
38.6
18.0
27.4
24.4
37.7
19.3
27.3
22.1
38.9
17.3
30.6
26.4
33.1
16.4
24.9
27.6
36.2
17.4
25.6
28.7
40.8
19.4
27.5
3.2
41.3
49.6
9.1
4.5
5.2
11.5
(24.0)
48.9
44.7
6.3
18.7
16.7
27.7
(13.1)
42.2
49.5
8.3
13.3
8.1
17.3
17.6
40.9
53.0
6.1
23.7
9.1
39.5
14.2
37.4
52.8
9.8
26.4
14.5
34.4
36.8
48.7
46.0
5.3
14.5
13.9
17.7
(4.2)
47.6
47.3
5.2
6.8
20.3
2.0
(33.5)
45.7
48.3
6.0
2.8
14.8
(6.1)
(0.2)
36.4
56.7
6.9
22.7
19.6
31.8
(14.2)
37.0
57.6
5.5
42.7
8.4
78.5
46.9
37.5
55.7
6.7
27.8
0.9
50.8
66.2
39.4
55.8
4.8
15.3
(0.4)
33.1
(8.2)
2QFY14 3QFY14
4QFY14 1QFY15
2QFY15
3QFY15 4QFY15
1QFY16 2QFY16 3QFY16
17.2 12.8
11.3
Source: Company; MOSL
10 February 2016
3

Cipla
Valuation and view
CIPLA has corrected sharply on delay in inhaler launches and US FDA concerns on
few recently inspected plants. However, monetization of its inhaler portfolio in the
developed markets continues to remain key near trigger for the stock. Cipla
currently trades at 23x FY16E and 22x FY17E (P/E).
We assign a target P/E of 18x on FY18E core EPS, at 20% discount to sector average
(one-year forward P/E):
Low EBITDA margins at 19-21% (FY14/15).
Poor return ratios: ROE at 11% and ROCE at 14% in FY15
Weak cash flow generation (INR6b over FY11-15)
Key catalysts to drive stock’s performance over the medium term are:
Launch of combination inhaler in UK market (USD 450m mkt size, few players)
Stronger performance in the US with Invagen portfolio.
Margin improvement in Medpro operations (acquired in July 2014)
Sustained strong growth in domestic formulations (42% of sales)
Exhibit 5: PE relative to Sensex
Exhibit 4: PE Band (x)
42
34
26
18
10
23.9
14.3
PE (x)
Median(x)
Peak(x)
Min(x)
Avg(x)
34.0
24.6
23.0
Cipla PE Relative to Sensex PE (%)
120
80
40
0
-40
45.8
LPA (%)
44.9
Source: Company, MOSL
Source: Company, MOSL
10 February 2016
4

Cipla
Story in charts
Exhibit 6: Sales growth at 12%, led by US & SA
Sales (INR m)
Growth YoY (%)
42
25
12
31
39
35
31
10
10
5
8
11
Exhibit 7: India business reported flat growth in 3Q
Domestic formulations
17
20
14
8
9
14
15
8
1
10
10
9
13
13
12
11
14
13
(0)
12
Growth YoY (%)
20
26
18
5
20
25
15
25
28
10
10
28
23
7
28
21
25
26
25
27
Exhibit 8: North America biz driving exports form.
Export formulations
Growth YoY (%)
78
51
34
18
2
10
12
14
13
12
12
(6)
13
17
22
19
17
32
33
Exhibit 9: Exports API sales trend
Export APIs (INR m)
37
18
(16)
1
(24)
2
(13)
1
2
2
2
14
(4)
1
(33)
1
(0)
2
Growth YoY (%)
47
66
38
12
10
10
28
39
17
(14)
2
2
2
(8)
1
Exhibit 10: EBITDA margins trend
24
27
21
EBITDA (INR m)
EBITDA Margin (%)
Exhibit 11: gNexium sales boosted profitability
27
Gross profit (INR m)
23
16
15
61
61
59
62
61
59
15
16
14
16
16
16
18
25
21
61
61
62
61
59
Gross margin (%)
67
65
22
18
16
20
20
20
5
4
7
6
5
4
5
6
6
5
10
8
5
12
12
13
18
Exhibit 12: EU inhaler market – Cipla likely to launch MDI products over next 12-18 months
MDI (USD m)
232
498
432
361
64
UK
France
248
44
Spain
293
52
Italy
DPI (USD m)
226
40
Germany
166
Others
Source: Company, MOSL
10 February 2016
5

Cipla
Exhibit 13: Formulation led sales growth
Formulations (INR b)
API (INR b)
Exhibit 14: EBITDA margins to stay in 21-23% range
EBITDA (INR b)
26.5%
24.1%
23.6%
21.7%
21.1%
EBITDA Margin
21.7% 21.6% 22.7%
11
6
102
8
10
19.1%
6
48
7
55
7
62
7
75
7
90
127
153
183
14
FY10
14
FY11
17
FY12
22
FY13
21
FY14
22
30
36
45
FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
FY15 FY16E FY17E FY18E
Exhibit 15: Inhaler launches to drive exports
Export Formulations (INR b)
YoY Growth (%)
Exhibit 16: Higher earnings growth on a low base
Core EPS (INR/ share)
0.0
0.0
5.0
0.0
0.7
14.0
23.0
24.8
33.3
27.1
15.3
6.8
23
FY10
27
FY11
10.9
30
FY12
38
FY13
29.6
40.6
24.1
10.9
23.6
49
FY14
54
76
95
117
12.6
12.0
13.6
14.2
17.3
FY15 FY16E FY17E FY18E
FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Exhibit 17: Steady ramp up in India formulation business
DF Revenue (INR b)
17.0
12.2
14.0
14.6
12.0
6.0
51
14.0
14.0
YoY Growth (%)
Exhibit 18: Better inventory management to improve cash
cycle
400
300
200
100
0
FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
177
185
184
191
192
197
181
166
159
Inventory Days
Creditor Days
Debtor Days
Cash conv. cycle Days
28
FY11
32
FY12
37
41
48
58
66
FY13
FY14
FY15
FY16E
FY17E
FY18E
Exhibit 19: Return ratios to remain under pressure
RoE (%)
20.6
15.7
17.2
14.4
14.3
12.7
13.8
10.5
18.0
19.4
16.4
13.7
15.7
14.9
15.8
14.1
16.1
RoCE (%)
18.5
Exhibit 20: Intangible asset
acquisition and Invagen
Tangible Assets (INR b)
on
account
of
Medpro
Intangible Assets (INR b)
45
26
0
27
0
34
0
36
0
40
43
47
59
27
50
50
61
62
FY10
FY11
FY12
FY13
FY14
FY15 FY16E FY17E FY18E
Source: Company, MOSL
FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Source: Company, MOSL
6
10 February 2016

Cipla
Financials and valuations
Key assumption
Segment growth
India
Exports form
Exports API
Total sales
Expenses
Raw material
Staff cost
EBITDA Margins
2011
12.2
15.3
17.1
14.1
43.9
8.9
21.7
2011
63,238
12.4
13,692
1.2
2,733
10,959
173
711
11,497
-90
11,586
1,914
16.5
2012
14.0
10.9
6.6
11.9
39.0
11.0
23.6
2012
70,207
11.0
16,589
21.2
3,122
13,466
238
722
13,950
-369
14,319
2,907
20.3
2013
14.6
27.1
-9.7
17.4
35.7
12.5
26.5
2013
82,793
17.9
21,979
32.5
3,305
18,674
276
1,323
19,721
-1,233
20,954
5,443
26.0
0.0
-62
15,449
11,440
4.7
2014
12.0
29.6
13.3
20.3
38.4
15.3
21.1
2014
101,004
22.0
21,331
-2.9
3,726
17,604
711
1,500
18,393
-408
18,800
4,634
24.6
159
-123
13,884
13,859
21.1
2015
17.0
10.9
-13.9
11.6
36.9
17.4
19.1
2015
113,454
12.3
21,617
1.3
5,047
16,570
726
1,226
17,069
527
16,543
4,000
24.2
482
-253
11,808
11,281
-18.6
2016E
6.0
40.6
31.7
24.7
36.0
17.1
21.7
2016E
139,024
22.5
30,168
39.6
5,437
24,732
1,681
1,870
24,921
0
24,921
5,856
23.5
480
-100
18,485
18,485
63.9
2017E
14.0
24.1
13.4
19.6
35.3
17.2
21.6
2017E
166,550
19.8
35,975
19.2
7,639
28,336
2,351
2,200
28,185
0
28,185
7,610
27.0
500
-200
19,875
19,875
7.5
2018E
14.0
23.6
13.3
19.5
34.8
17.0
22.7
2018E
198,946
19.5
45,161
25.5
7,682
37,479
2,251
2,500
37,728
0
37,728
10,186
27.0
550
-250
26,741
26,741
34.5
Income Statement
Y/E March
Net Income
Change (%)
EBITDA
Change (%)
Depreciation
EBIT
Int. and Finance Charges
Other Income - Rec.
PBT before EO Items
Extra Ordinary Expense
PBT but after EO Exp.
Tax
Tax Rate (%)
Minority Interest
Income from associates
Reported PAT
Adj PAT
Change (%)
(INR Million)
9,673
9,598
-5.4
11,412
10,927
13.9
Balance Sheet
Y/E March
Equity Share Capital
Reserves
Net Worth
Loans
Deferred Liabilities
Minority Interst
Capital Employed
Gross Block
Less: Accum. Deprn.
Net Fixed Assets
Capital WIP
Investments
Curr. Assets
Inventory
Account Receivables
Cash and Bank Balance
Others
Curr. Liability & Prov.
Account Payables
Provisions
10 February 2016
2011
1,606
64,966
66,661
5,410
2131
0
74,202
42,406
11,464
30,942
2,853
5,908
46,263
19,061
14,908
960
11,334
11,764
9,562
2,203
2012
1,606
74,694
76,389
135
2332
0
78,856
46,269
14,111
32,158
3,712
12,688
44,945
18,501
15,536
905
10,003
14,646
12,214
2,432
2013
1,606
88,491
90,187
9,971
2805
0
102,963
53,279
17,076
36,203
3,674
25,324
51,376
23,871
16,688
1,430
9,387
13,615
10,791
2,824
2014
1,606
98,808
100,504
12,609
3090
496
116,698
87,604
21,757
65,847
3,536
7,086
57,535
28,953
16,389
1,752
10,442
17,306
13,882
3,424
2015
1,606
106,197
107,892
17,018
2846
1927
129,684
95,935
27,178
68,757
5,349
6,398
76,201
37,806
20,043
5,643
12,710
27,021
21,215
5,806
2016E
1,606
122,137
123,832
40,018
3317
1927
169,095
132,138
34,427
97,711
5,349
6,398
94,131
42,541
24,607
13,268
13,714
34,494
25,525
8,969
(INR Million)
2017E
1,606
139,663
141,359
47,018
3317
1927
193,621
148,471
42,066
106,405
5,349
6,398
114,969
47,328
29,479
23,343
14,819
39,500
29,984
9,516
2018E
1,606
164,056
165,752
45,018
3317
1927
216,014
156,471
49,748
106,723
5,349
6,398
143,363
55,733
35,213
36,383
16,034
45,819
35,101
10,718
7

Cipla
Financials and valuations
Ratios
Y/E March
EPS
Cash EPS
BV/Share
DPS
Payout (%)
Valuation (x)
P/E
Cash P/E
P/BV
EV/Sales
EV/EBITDA
Dividend Yield (%)
Return Ratios (%)
RoE
RoCE
Working Capital Ratios
Fixed Asset Turnover (x)
Debtor (Days)
Inventory (Days)
Working Capital (Days)
Leverage Ratio (x)
Current Ratio
Debt/Equity
2011
12.0
15.4
82.9
0.3
30.8
2012
13.6
17.5
95.0
0.2
14.4
2013
14.2
18.4
112.2
2.0
12.2
2014
17.3
21.9
125.1
2.0
13.5
2015
14.0
20.3
134.3
2.0
15.9
2016E
23.0
29.8
154.1
2.2
11.4
2017E
24.8
34.3
175.9
2.5
11.8
2018E
33.3
42.9
206.3
2.5
8.8
39.2
30.5
5.6
6.1
25.8
0.0
37.5
29.1
4.8
5.3
19.9
0.4
30.9
24.4
4.3
4.4
20.6
0.4
38.0
26.3
4.0
3.9
20.4
0.4
23.2
17.9
3.5
3.3
15.1
0.4
21.6
15.6
3.0
2.7
12.6
0.5
16.0
12.5
2.6
2.2
9.7
0.5
14.4
15.7
14.3
18.0
12.7
19.4
13.8
16.4
10.5
13.7
14.9
15.7
14.1
15.8
16.1
18.5
2.5
86
110
194
2.2
81
96
153
2.4
74
105
160
2.0
59
105
136
1.7
64
122
144
1.7
65
112
157
1.6
65
104
165
1.9
65
102
179
3.9
0.1
3.1
0.0
3.8
0.1
3.3
0.1
2.8
0.1
2.7
0.2
2.9
0.2
3.1
0.1
Cash Flow Statement
Y/E March
Op. Profit/(Loss) before Tax
Interest/Dividends Recd.
Direct Taxes Paid
(Inc)/Dec in WC
CF from Operations
EO expense
CF from Oper. incl EO Expense
(inc)/dec in FA
Free Cash Flow
(Pur)/Sale of Investments
CF from Investments
Issue of Shares
Inc/(Dec) in Debt
Interest Paid
Dividend Paid
Others
CF from Fin. Activity
Inc/Dec of Cash
Add: Beginning Balance
Closing Balance
2011
13,692
711
-1,574
-2,630
10,199
-90
10,289
-9,574
715
-3,444
-13,018
866
5,359
-173
-2,983
-1
3,068
339
621
960
2012
16,589
722
-2,706
4,145
18,750
-369
19,119
-5,197
13,922
-6,780
-11,977
-39
-5,275
-238
-1,645
1
-7,197
-55
960
905
2013
21,979
1,323
-4,970
-6,937
11,395
-1,233
12,627
-7,313
5,314
-12,636
-19,949
228
9,836
-276
-1,879
-62
7,847
526
905
1,430
2014
21,331
1,500
-4,349
-2,147
16,334
-408
16,741
-33,232
-16,491
18,239
-14,993
-1,689
2,638
-711
-1,879
213
-1,427
321
1,430
1,751
2015
21,617
1,226
-4,244
-5,060
13,539
527
13,012
-9,769
3,242
688
-9,082
-1,109
4,409
-726
-1,879
-735
-39
3,891
1,752
5,643
2016E
30,168
1,870
-5,385
-2,831
23,822
0
23,822
-34,391
-10,569
0
-34,391
-431
23,000
-1,681
-2,114
-580
18,195
7,626
5,643
13,269
2017E
35,975
2,200
-7,610
-5,758
24,807
0
24,807
-16,333
8,474
0
-16,333
0
7,000
-2,351
-2,348
-700
1,601
10,075
13,268
23,343
(INR Million)
2018E
45,161
2,500
-10,186
-9,035
28,440
0
28,440
-8,000
20,440
0
-8,000
0
-2,000
-2,251
-2,348
-800
-7,399
13,040
23,343
36,383
10 February 2016
8

Cipla
Corporate profile: Cipla
Company description
Cipla is the largest player in the domestic
formulations market and has a presence across
most therapeutic areas. The company also has
robust exports to several markets including US,
Europe, South Africa, Australia and the Middle
East. Cipla's strategy for regulated markets (Europe
and US) exports is built around supply tie-ups with
global players.
Exhibit 21: Sensex rebased
Exhibit 22: Shareholding pattern (%)
Dec-15
Promoter
DII
FII
Others
36.8
12.2
24.7
26.3
Sep-15
36.8
11.7
24.8
26.6
Dec-14
36.8
11.4
25.7
26.2
Exhibit 23: Top holders
Holder Name
LIC of India
Oppenheimer Developing Markets Fund
Virtus Emerging Markets Opportunities Fund
Vontobel India Fund
% Holding
5.4
1.7
1.5
1.2
Note: FII Includes depository receipts
Exhibit 24: Top management
Name
Y K Hamied
M K Hamied
Subhanu Saxena
Rajesh Garg
Designation
Chairman
Vice Chairman
Managing Director & CEO
Executive Director & CFO
Exhibit 25: Directors
Name
Y K Hamied
M K Hamied
Subhanu Saxena
Ashok Sinha*
Peter Mugyenyi*
Name
Rajesh Garg
Punita Lal*
Nachiket Mor*
S Radhakrishnan
Adil Zainulbhai
*Independent
Exhibit 26: Auditors
Name
R G N Price & Co
V Sankar Aiyar & Co
D H Zaveri
Type
Statutory
Statutory
Cost Auditor
Exhibit 27: MOSL forecast v/s consensus
EPS
(INR)
FY16
FY17
FY18
MOSL
forecast
23.0
24.8
33.3
Consensus
forecast
23.1
28.7
35.4
Variation
(%)
-0.6
-13.4
-5.9
10 February 2016
9

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