Edelweiss Financial Services Ltd

BSE: 532922 | NSE: EDELWEISS | ISIN: INE532F01054 
Market Cap: [Rs.Cr.] 3,833.67 | Face Value: [Rs.] 1
Industry: Finance & Investments

Management Discussions
Management Discussion and Analysis Report


The Indian economy has seen a sustained downturn over the last two years with theresult that GDP growth was merely ~5% in FY13 - slowest pace of expansion in nearly adecade. Despite such a sharp slowdown, inflation concerns have persisted with WPIinflation ruling over 7% in FY13and CPI inflation still running close to double-digits. Atthe same time, Current Account Deficit (CAD) as a percentage of GDP has continued to widenin recent years and was at an all time high of ~5% in FY13. Along with this, the fiscaldeficit also continued to present challenges to economy; though the Union Budget 2013-14did try to assure greater level of discipline over fiscal deficit. High CAD and fiscaldeficit together present some of the most serious challenges to bringing Indian economyback on the path of growth. Such a prolonged slowdown has been the result of a confluenceof factors - lingering administrative bottlenecks and associated slowdown in projectclearance, large fiscal spending, tight monetary conditions and weak external demand.

However, during second half of FY13, there was some stability in macro environment,largely as a result of a series of steps undertaken by the government such as liberalisingof FDI regime in certain sectors, rationalisation of retail fuel prices and reining in offiscal spending; although a lot more remains to be done. While the situation appeared tobe improving, some recent developments on political front have once again raised concernsabout Government's ability to carry forward the reform process.

The early signs of macroeconomic stability that we are seeing are:

a) Receding inflation concerns: After a long phase of elevated inflation, pricepressures (particularly with regard to core inflation) are receding in the economy led byweakening demand and recent fall in international commodity prices. In the coming year, inwhich we can expect core inflation to remain contained to around 5-5.5% as indicated byRBI, trend in food inflation will be determined by the ensuing monsoon and quantum of MSPhikes by Government.

b) Signs of a more accommodative Monetary Policy: Amidst a sustained phase ofhigh inflation and expansionary fiscal policy, RBI had to pursue a tight monetary regimeto contain inflation. However in the beginning of FY13, it started to reverse the ratecycle in a cautious manner. As we moved into FY14, RBI once again announced a calibratedreduction in repo rate while adding that further cuts may have to wait. However, themonetary transmission so far has been very poor in the banking industry, though the samehas been significant in the bond markets. Going forward, RBI will have to supportliquidity conditions so that policy rate cuts can be transmitted to wider economy.

c) Attempts to revive business confidence: One of the major reasons forinvestment cycle slowdown is significant erosion in business confidence. Administrativelogjam has intensified over last couple of years, leading to a large number of projectsbeing shelved and businesses holding back fresh capex plans. However, since September,Government has taken a slew of politically difficult measures like diesel price hikes andFDI in retail, etc. to tackle the same. The Finance Minister also assured a stable andequitable tax regime and deferred the implementation of GAAR to boost confidence offoreign investors.

d) Record Current Account Deficit (CAD) amidst considerable fiscal tightening: CurrentAccount Deficit (CAD) in FY13 is the highest ever at ~5% of GDP as gold and oil importsrose sharply, while exports declined on weak external demand. High CAD increases macrovulnerability, as the country has to rely on fickle foreign flows to fund the CAD.However, recent fall in oil and gold prices and restrictions on gold imports shouldcontain CAD. Moreover, improving global economy has also resulted in exports gainingtraction. So overall CAD may have seen its worst and is expected to improve in FY14.

e) Global developments: The external economy has been weak throughout FY13 andthis is reflected in poor performance of India's exports. However, financial risks inglobal economy have subsided substantially with interventions by major central banks,particularly ECB. In late 2012, ECB provided a much-needed lifeline to European troubledsovereigns by announcing Asset Purchase Programme. Meanwhile, economic data particularlyfrom the US, suggests an improving trend including better US housing and labour markets,which have been at the heart of global problems since 2008. Both these developments augurwell for global economy.

However, despite these expected improvements, expected GDP growth for the country inFY14 is likely to be marginally higher at ~6%only.

Capital Markets

FY13 bought some respite to investors, after a dismal FY12. The year started on aworrying note, owing to announcement of retrospective taxing of FIIs. However, a change ofguard at Finance Ministry turned things around, with Government announcing a series ofreforms like FDI in retail, diesel price hike and restructuring of SEBs etc. ECB'sannouncement of OMT (Outright Monetary Easing) and Fed's QE3 further added liquidity andsupport to markets. This resulted in India's outperformance among Emerging Markets, withFIIs pumping in ~USD 26 billion of inflows during the year. However, markets corrected inthe last quarter owing to global cues and political uncertainty faced by Government.Within Capital Markets however, fresh capital raising activity continued to suffer themost with capex investment cycle grinding to a near halt. Going forward, FY14 looks like ayear of improving macros, but politics could be an overhang on the markets with nationalelections barely a year away and corporate business confidence being low.

Emerging Markets

FY13 was a volatile year for Emerging Market equities with markets rallying in Q2 andQ3 of FY13 but declining in the first and last quarters. Improvement in US data, Japan's"Abenomics" and growth not recovering in Emerging Markets resulted in the outperformance of Developed Markets. Among Emerging Markets, Brazil, Russia and South Africawere among the worst performers, while smaller markets namely Turkey, Philippines andMexico outperformed. Main highlights of FY13 were ECB's commitment that it will doanything to save the Euro and Quantitative Easing in US. Going forward in FY14, globalliquidity should continue to remain high. However, growth would be the main attraction offoreign investors to Emerging Market equities.

Commercial Credit Markets

Indian commercial banks' non-food credit grew around 14% in FY13, lower than that ofthe previous year. Though interest rates began their journey southward this year, lack ofinvestment demand on the back of slowing economy resulted in subdued growth, when seen inthe backdrop of 20%+ growth witnessed till about two years ago. Apart from this, banks,especially public sector banks, also had to combat deteriorating asset quality as a directfallout of slowing economy. Credit growth and asset quality of PSU and private banks goingforward, is likely to show divergent trends. While PSU banks' slippages will remain highin the near term, we expect private players to fare well. With a cut in lending rates,coupled with gradual improvement in macro conditions, we expect stress to reduce over themedium term and credit growth to occupy centre stage once again.

While commercial banks continue to remain the dominant source of debt capital in India,NBFC credit also supports credit growth in the country. NBFCs have been growing at ahigher rate than banks due to a smaller base. Non-bank credit growth thus presents a largeand growing opportunity in both Corporate and Retail Finance.

Debt Markets

The Government's commitment to rein in fiscal deficit and associated reforms in H2FY13were welcomed by debt markets. These steps have ushered a regime of much needed fiscaldiscipline and averted the spectre of a sovereign rating downgrade. This together withreduction in repo rates resulted in a sharp uptick in appetite for debt market instrumentsin second half of the year compared to a cautious first half.

The efforts of Government and regulatory bodies continue to be directed at deepeningbond markets, especially the Corporate Debt segment, where volumes are yet to pick up.Attracting liquidity to various sub-segments is key to achieving this momentum and it iswith this objective that SEBI has decided to provide a dedicated debt segment on theexchanges. The availability of a screen based trading interface is expected to bring inincreased pricing transparency, thereby widening investor base and ramping up liquidity.This can potentially have a favourable impact on some of currently dormant initiativeslike Corporate Bond Repos and CDS, which are imperative for an integrated debt marketecosystem. With the monetary transmission being more efficient in bond markets, a largenumber of top rated corporates have mobilised significant amount of debt capital in thebeginning of FY14 which augurs well for the bond markets.

Other big-ticket reforms in debt space have been enhancement of FII debt limits andliberalisation of FII debt investment norms. FII appetite for Indian rupee debt was robustdespite weakening currency and net foreign flows into Indian bonds aggregated around USD 5billion in FY13. The Government responded to FII demand by hiking investment limits by USD10 billion in Government long-term debt and USD 5 billion in corporate long-term debt.Overall, investment process was also further simplified and an auction mechanism to securelimits has been replaced by an "on-tap" system in case of corporate debt untillimit utilisation reaches 90%. These reforms coupled with improving macroeconomic outlookwill keep up the pace of FII inflows.


Edelweiss Financial Services Limited (EFSL), incorporated in 1995, started as a nicheInvestment Banker with a focus on private equity advisory. Over the last 17 years,Edelweiss has successfully followed a strategy of synergistic diversification of itsbusinesses and built a portfolio of cutting-edge high growth businesses in financialservices. It has de-risked and reduced volatility by diversifying across businesses, assetclasses, client segments and geographies. It has created a portfolio of scalable and highgrowth businesses by expanding addressable market segments and client segments. Thisstrategy has well supported operations of Edelweiss across cycles by bringing stability toits performance. As a result, Edelweiss has emerged as a truly diversified leadingfinancial services organisation with a large range of products and services coveringmultiple asset classes and consumer segments and well diversified revenue streams.

The Company's research and analytics driven approach and consistent ability to spot,innovate and capitalise on Emerging Market trends has enabled it to foster strongrelationships across clients spanning sovereign funds, corporates, SME, institutions-foreign and domestic, HNI, mass affluent, retail and low income groupclients.

Edelweiss in its early days focused on being a niche player in private equity undercorporate finance advisory and then diversified into other wholesale and financial marketsbusinesses. Until 2008, Edelweiss was earning about 70% of its revenue from financialmarket related activities and wholesale segment accounted for almost 100% of its revenue.However, in order to diversify and enter into retail businesses which presented largeopportunities, the company followed its objective of building a fully diversified set ofbusinesses in financial services during the period 2008-2012. As a result, after fiveyears, today financial markets related businesses account for only about 20% of theconsolidated revenue of EFSL. The Company is also well on its chosen path of achieving itsobjective of having a healthy mix of revenue from wholesale and retail businesses.

From catering to a few hundred wholesale clients in 2008, Edelweiss Group now has anaccount base of nearly 450,000 clients from retail and wholesale segments acrossbusinesses. In addition, our Depository Participants maintain over 250,000 DP accounts.

While diversifying and continually adding newer businesses to its portfolio, theCompany has also demonstrated a strong track record of growth over the last several yearswith its 10 yearCAGR for Revenue at 71% and PAT at 81% till the end of FY13. The company'sphenomenal growth has been powered by strategic vision, strong belief and adherence to itscore values and guiding principles, its ability to raise capital and deploy itjudiciously, attract and retain talent and a strong focus on technology, corporategovernance and risk management.

We are happy to note that Edelweiss Financial Services Limited has been voted"Best Midcap Company" in India by the readers of Hong Kong based Finance Asia,Asia's leading financial publishing house, in its annual poll recently.

Edelweiss has also recently won the award for "Best Corporate Governance, India2013" from the London based Capital Financial International Jury.


At Edelweiss, we have constantly worked towards building our product lines and managingour growth in the last decade. As we pursue more business opportunities, and as theCompany grows and becomes more complex, we have to ensure that we remain efficient andeffective. This requires constant effort towards organisation building, leadership growthand sharpening our backend systems, processes and technologies. Further, as our clientbase gets larger, more diverse and geographically spread, we must find newer ways ofmeeting their expectations in an innovative, customer-centric and consistent manner. Wealso must remain on our toes to identify and control newer risks.

To meet future challenges, we have organised the businesses of Edelweiss around fourbroad business groups - Credit including Housing and SME Finance, Financial Marketsincluding Asset Management, Commodities and Life Insurance. Each of these fourbusiness groups is, in turn, organised around Strategic Business Units (SBUs) catering toa specific vertical within the business group, based on commonality of business drivers,client segments, resources and backend support required. Finally, each SBU comprisesseveral lines or sub-lines of businesses (LoBs) to impart greater focus oncustomer-centricity and performance evaluation of their specific business.

With the designed diversification in nature of businesses from agency-based tocapital-based, the Group also has to increasingly manage its liquidity and liabilities asalso to ensure proper asset liability match. The Treasury & Balance Sheet ManagementUnit (BMU) manages these vital functions.

These four business groups and Treasury & BMU are controlled and supported by acore of Enterprise groups that provide consistent quality and rigour to key processfunctions. These groups focus on improving efficiency and productivity and enhance ourability to deal with increasing complexity. As a part of organisation build out, we havealso invested significantly in our risk management policies, HR processes, people andtechnology so that we are able to build a large efficient organisation and manage itscomplexities well.

Our organisational structure is nimble, supple and evolving. While all the SBUs willdrive synergies as well as address common needs, at an overall Edelweiss level there isoneness on key areas such as core value systems, culture, long-term strategy andallocation of key resources. At the same time, in order to build the SBUs into largeindependent businesses, some of the enterprise functions are being gradually decentralisedso that they resemble, think and function like independent companies. This will align theenterprise functions to specific business requirements of respective SBUs and improvedecision-making process. We have made a beginning in this direction in FY13 and will takeit forward inthenextyear.

The diverse businesses of Edelweiss are conducted through an organisational structureconsisting of 44 subsidiaries. These subsidiaries are regulated by various regulators inthe country depending upon the business being handled by them. We have a presence in 106major cities through 211 offices including three international offices as on March 31,2013. Together with a nearly 4,000 strong network of Authorised Persons and Sub-brokers,Edelweiss footprint covers nearly 545 cities across India including about 280 tier 3 to 5towns. Edelweiss Group employs 3,907 employees, leveraging a strong partnership andownership culture.


Ever since its inception, Edelweiss has successfully followed the strategy ofsynergistic diversification while focusing on people, processes, products and structure.This strategy has stood us in good stead as demonstrated by the resilience of our businessmodel across cycles. Since inception, Edelweiss has recorded significant improvement inits topline by adding newer lines of businesses. In recent past, the diversificationstrategy has resulted in growth in financial and business parameters successively in thepast six quarters on a quarter-on-quarter basis despite the operating environment beingchallenging.

At the core, our broad strategy, which has resulted in our success over the years, hasremained tied to following eight key pillars:

• Strong Governance & Compliance Culture

• Focuson Risk Management

• Strongand Liquid Balance Sheet

• Commitment to People and Leadership Development

• Leveraging Technology for Strategic Advantage

• Quality Customer Centricity

• Research & Analytics based decision making

• Culture of Social Responsibility

These pillars constitute key strengths of Edelweiss vis-a-vis competition. Theyhave enabled us launch new businesses, scale them up, gain market share and achieve aleadership position over past 17 years. As a result, we have a core leadership team, abroad array of products and services, a strong foundation of large financial capital, abrand that is well recognised and most of all: clients who want to do business with usrepeatedly. At its core, the strategy is governed by the aspiration to become a bridgebetween savers of capital and users of capital, by channelising savings into investmentsefficiently. Following this broad strategy, despite environment in recent past having beentough, we have grown our share in financial services industry in both relative andabsolute terms as well as post perceptible improvement in our financial and businessperformance.

In the post-global financial crisis era, year 2010-11 had witnessed return of growthand higher levels of activity in markets. As a result, most of the corporates had postedslightly better earnings in FY11 compared to previous year. However, improvement inbusiness climate was short-lived as towards the end of FY11, environment had again turnedchallenging on the back of Eurozone sovereign debt crisis and a weak U.S. recovery coupledwith a host of domestic issues. As a result, the next year i.e. FY12 turned out to besignificantly worse. At the same time, we at Edelweiss continued to run the last lap ofthe marathon to diversify our businesses, which we started in 2008-09. This also entailedsignificant investment in building new businesses, which passed through our Profit &Loss account. Tough operating conditions and investment in new businesses, therefore,resulted in our profitability bottoming out in Q2FY12.

However, with investment phase nearing its end and despite no significant improvementin operating conditions, strategy of diversification of businesses started paying outdividend and our financial and business parameters have started improving since Q2FY12. Wehave maintained the trend of recording consistent improvement in our financial andbusiness parameters quarter on quarter in whole of FY13 as well, taking the trend to sixconsecutive quarters by now. As a result, we recorded a YoY growth of 31% in our totalrevenue this year and our profit after tax and minority was higher by 40% over FY 12.

We also devoted FY13 to improving capital and operating efficiencies. With nosignificant improvement expected in environment, we will continue to focus our energiestowards eking out incremental growth and further improving efficiency and productivity inFY14. This should hopefully place us on path to strong growth in the following years.

As mentioned earlier, over last 10 years, our total revenue has grown at a CAGR of 71%and net profit has increased at a CAGR of 81% as at the end of FY13. Thus, our performanceacross market cycles demonstrates our ability to withstand impact of external forces andyet be able to build a robust and agile company that can exploit growth opportunities andturn them into business wheneverthey re-appear.


* Total Revenue of Rs. 21,840 million (Rs. 16,707 million for FY12), up31%

* Profit after Tax of Rs. 1,785 million (Rs. 1,277 million for FY12), up40%

* DilutedEPSof Rs. 2.31 (Rs. 1.66forFY12)(FV Rs. 1)

The Board of Directors has recommended a final dividend of Rs. 0.10 per equity share(on a face value of Rs. 1) for FY13, subject to approval of members of the company at theensuing Annual General Meeting. During the year, the Company had paid interim dividend ofRs. 0.55 per equity share (on a face value of The total dividend for FY13, therefore,works out to Rs. 0.65 per equity share (FVwhich is equalto 65% Dividend Rate.


Of the four business groups of Edelweiss, Credit and Commodities businesses togetherwith Treasury & BMU are capital-based contributing to the revenue by way of interestand other capital-based income. Of the remaining two, Financial Markets business is anagency businesses generating fees & commission and Life Insurance business earnspremium income. Some of the capital businesses also generate fee & commission incomewhile executing client transactions.

Capital Based Revenue

Our capital-based businesses earned interest and treasury related revenue of Rs. 18,122million for FY13 (Rs. 13,387 million for FY12), a significant rise of 35% over theprevious year. Out of this, interest income was Rs. 15,355 million (Rs. 10,660 million forFY12), up44%.

Continuing our efforts since FY11, with scale up of credit book this year, interest onloans emerged as a major revenue stream for us and accounted for nearly one-third (32%) ofour total revenue forFY13.

Agency Fee & Commission

Our agency businesses recorded a fee & commission revenue of Rs. 3,194 million forthe year, similar to FY12 revenue of Rs. 3,213 million. This included Securities BrokingIncome of Rs. 1,394 million (Rs. 1,401 million for FY12) and Advisory & Other Fees ofRs. 1,632 million (Rs. 1,670 million for FY12). Securities Broking income accounted for6.4% of our total revenue for FY13.

The slowdown in capital market activity levels, which began in third quarter of FY11,continued through FY12 and FY13. Corporate Finance and Advisory services were alsolacklustre with new capital raising from the markets at extremely low levels. Hence, theindustry witnessed its revenue pool being static and even lower in some verticals in FY13compared to previous year. Despite this, we have been able to protect our Agency Fee &Commission revenue.

Premium from Life Insurance Business

Our life insurance business was launched in second quarter of FY12 and it recorded atotal premium of Rs. 525 million for the year (Rs. 107 million for FY12) reflecting theplanned scale-up of this business. We expect this revenue stream to grow significantly intheyearsto come.


With growth in income from our capital-based businesses, the concept of Net Revenue(net of interest cost) has become more appropriate to us. This is because interest cost,as with all Banks and large NBFCs, should reflect above the expenses line. On a netrevenue basis, our Agency fee & commission and insurance premium for the year was Rs.3,719 million (Rs. 3,320 million for FY12) and Capital based net revenue - net of interestcost, all the interest cost being for capital revenue - was Rs. 6,988 million (Rs. 5,090million for FY12). Thus the total net revenue for FY13 was Rs. 10,707 million (Rs. 8,410million for FY12), showing a 27% growth. At the net revenue level, Agency & Insurancerevenue and Capital based net revenue contribute a balanced mix of 35% and 65%respectively.


Our total costs this year were Rs. 19,247 million compared to Rs. 14,720 million inFY12, an increaseof31%.

With the scale up of insurance business, amount of change in life insurance policyliability - actuarial passing through the P&L Account is also increasing. This yearonwards we have, therefore, started showing it as a separate expense item. This will alsoenable a more consistent comparison of operating expenses.

Despite economic downturn, we continued to invest in build out of our new and growthbusinesses and carried on hiring for some of the new businesses like Life Insurance andRetail Finance. We also continued to hire selectively in senior positions as part of ourorganisation building process. As a result, we added about 800 employees during the yearcontributing partly to the 34% escalation in our employee costs in FY13.

Our borrowings in FY13 were higher compared to the previous year by Rs. 11.19 billionreflecting the scale up in credit book by Rs. 17.87 billion. However, at the same time ouraverage cost of borrowings for FY13 was 10.1%, higher by about 40 basis points YoY. Boththese factors resulted in our finance cost increasing by 34%inFY13overFY12.


Our Profit after Tax and Minority for FY13 was Rs. 1,785 million compared to Rs. 1,277million for FY 12.

Analysis of Profitability

As mentioned earlier, despite the operating environment being tough, we havedemonstrated consistent improvement in profitability in each of the past six quarters on aQoQ basis because of the diversification strategy that we have actively implemented. Whileour profitability is on an upward trajectory, it was still impacted by the followingfactors:

• FY13 was one of the toughest years for Financial Market businesses leading toindustry revenue pool remaining static or even shrinking in some verticals. This reflectedin our Agency Fee & Commission remaining flat in FY13 compared to FY12.

• Despite marked slowdown in the industry, we continued to invest in building ournew businesses, namely, Life Insurance and Retail platforms - Housing & SME Finance,Retail Financial Markets and AMC for long-term growth. Investment in all these initiativesby way of build out cost passed through our Profit & Loss Account.

• We also continued to invest in organisation building and infrastructure upgrade.In addition, certain investments such as loan to our employee trust, which are currentlynon-yielding but long-term accretive, are causing a dragon our profitability.

• Cash burn in our newest business, Life Insurance, while being as per the plan,also impacts our profitability as we currently hold74%equityintheJV.

All these factors, therefore, affected our bottom line and margins for the year. Whilesome of the businesses like Retail Financial Markets and Retail Finance have now brokeneven, the costs associated with planned scale up of insurance business will be somewhathigher going forward. However, excluding the loss in insurance business, our net profitfor FY13 would have been around Rs. 2,430 million. With our Tangible Equity at Rs. 26,550million as on March 31,2013 (excluding good will, deferred tax assets and loan to employeetrust), the return on tangible equity thus comes to around 11% for FY13, which is around4% higher than the reported Return on Equity. Our Cost to Income Ratio excluding insurancehas moved from 71% in FY12 to 67% in FY13. The improving trend is better visible if we seethat this ratio for Q4FY13 is 63%.

Since the Life Insurance business has a long gestation period and the capital structureof our Life Insurance JV leads to cash burn passing through P&L, though its effect atthe balance sheet level is different, we consider it appropriate to analyse ourprofitability ex-insurance. The year FY13 was thus a year of consolidation for us andmarks the point of inflection in our financial performance. At the same time, with theinvestment phase complete, we are currently focusing on improving efficiency andproductivity. Our profitability ex-insurance, therefore, should maintain its upwardtrajectory barring any drastic changes in environment.

Our Profit before Tax margin for the year was 12% and Profit after Tax margin 8%. Sincea larger share of revenue is now coming from capital-based businesses (83%), the profitmargins are aligned with those of the banking and large NBFCs industry.

As a part of our constant efforts to enhance our disclosure levels, we had included ananalysis on profitability and capital efficiency of our main business groups in the AnnualInvestor Presentation for FY12, which was shared with all the stakeholders and isavailable on our website. Continuing this endeavour, the business-wise financial databased on Management's estimates for FY13/as on March 31,2013 is as under:

(Rs. million) Revenue Profit before Tax Tangible Equity1 Tangible Capital Employed1 Pre-tax RoE Pre-tax RoA
Credit 8,950 1,990 10,250 60,650 19% 3.3%
Financial Markets & 4,570 320 3,400 12,570 10% 2.6%
Asset Management
Commodities 4,270 880 3,950 23,470 22% 3.7%
Treasury BMU2 3,070 360 2,350 29,950 15% 1.2%
Corporate & Unallocated3 - -310 2,040 10,680 N/A N/A
Total - Ex Insurance 20,860 3,240 21,990 137,320 15% 2.4%
Insurance 980 -650 4,560 4,560 N/A N/A
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Key Information

Key Executives:

Rashesh Shah , Chairman & Managing Director

Venkat Ramaswamy , Whole-time Director

Kunnasagaran Chinniah , Director

Narendra Jhaveri , Director

Company Head Office / Quarters:

Edelweiss House,
Off C S T Road Kalina,
Phone : Maharashtra-91-22-22864400/4820 / Maharashtra-
Fax : Maharashtra-91-22-22864278 / Maharashtra-
E-mail : efsl.shareholders@edelweissfin.com
Web : http://www.edelweissfin.com


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