Patel Engineering Result Updated

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3QFY2012 Result Update | Infrastructure

February 1, 2012

Patel Engineering
Performance Highlights
Y/E March (` cr) Net sales Operating profit Net profit after MI 3QFY12 619.3 111.3 20.0 3QFY11 434.6 58.0 9.8 2QFY12 948.5 111.5 30.1 % chg (yoy) 42.5 91.7 104.8 % chg (qoq) (34.7) (0.2) (33.5)

NEUTRAL
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Infrastructure 750 1.6 240/73 183,470 1 17,301 5,236 PENG.BO PEC@IN

`108 -

Source: Company, Angel Research

For 3QFY2012, Patel Engineerings (PEL) numbers came in above ours and streets estimates. The company posted strong revenue growth during the quarter, mainly on account of its international subsidiaries. However, we are not revising our numbers on the basis of this quarters performance, as we believe recovery to the growth path for PEL will take time as order inflow concerns loom large and as the current order book is plagued with delays/deferrals. Also, the company is yet to provide for the hedging loss incurred due to project cancellations, which we believe would materialize and impact the companys financials in future. Hence, we maintain our negative stance on the company and a Neutral rating on the stock. Numbers surprise positively due to lower depreciation and interest cost: For 3QFY2012, on a consolidated basis, PEL posted net sales growth of 42.5% yoy primarily due to good performance of its international subsidiaries. EBITDA margin came as a surprise at 18.0%, as international subsidiaries reported superlative margins of 19.5%. Therefore, reported PAT for the quarter grew by 104.8% yoy, despite a 63.4% yoy/14.1% qoq increase in interest cost. Outlook and valuation: PELs core C&EPC business is currently facing headwinds with its large projects facing delays and a disappointing order inflow. Further, the longer gestation nature of its order book, macro headwinds and increasing debt levels put the companys growth visibility for the next few quarters under doubt. Hence, we maintain our Neutral view with a fair value of `106/share. Key risks to our recommendation are: 1) pick-up in order inflow from the power segment in the near term; 2) earlier-than-expected execution from the companys slow-moving orders; and 3) raising of capital and the resultant decline in debt levels.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 45.6 11.7 6.6 36.1

Abs. (%) Sensex Patel

3m (1.0)

1yr (4.0)

3yr 90.8 (27.5)

10.8 (53.4)

Key financials (Consolidated)


Y/E March (` cr) Net sales (incl op. income) % chg Adj. net profit % chg FDEPS (`) EBITDA margin (%) P/E (x) RoAE (%) RoACE (%) P/BV (x) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

FY2010 3,191 29.7 198 42.4 28.4 15.9 3.8 16.7 12.5 0.6 0.8 5.2

FY2011 3,476 8.9 123 (38.1) 17.6 14.3 6.2 8.8 10.5 0.5 1.0 6.7

FY2012E 3,573 2.8 104 (15.3) 14.9 13.4 7.3 7.0 9.0 0.5 0.9 6.9

FY2013E 3,609 1.0 103 (0.7) 14.8 13.1 7.3 6.6 8.2 0.5 1.0 7.6

Shailesh Kanani
022-39357800 Ext: 6829 [email protected]

Nitin Arora
022-39357800 Ext: 6842 [email protected]

Please refer to important disclosures at the end of this report

Patel Engineering | 3QFY2012 Result Update

Exhibit 1: Quarterly performance (Consolidated)


Y/E March (` cr) Net sales Total expenditure Operating profit OPM (%) Interest Depreciation Non operating income Nonrecurring items Profit before tax Tax Net profit before MI PAT (%) Minority interest (MI) Reported net profit after MI Adj. PAT (%) FDEPS
Source: Company, Angel Research

3QFY12 619.3 508.1 111.3 18.0 59.2 20.5 2.4 33.9 12.2 21.7 3.5 1.7 20.0 3.2 2.9

3QFY11 434.6 376.6 58.0 13.4 36.2 18.6 7.1 1.0 11.3 2.7 8.6 2.0 (1.1) 9.8 2.3 1.4

2QFY12 948.5 837.0 111.5 11.8 51.9 15.1 2.5 47.1 15.9 31.1 3.3 1.0 30.1 3.2 4.3

% Chg (yoy) 42.5 34.9 91.7 460bp 63.4 10.5 200.2 361.9 150.6 150bp 104.8 104.8

% Chg (qoq) (34.7) (39.3) (0.2) 620bp 14.1 35.8 (5.1) (27.9) (23.2) (30.4) 20bp (33.5) (33.5)

9MFY12 2,324.2 1,983.9 340.3 14.6 174.5 61.9 7.2 111.1 39.2 72.0 3.1 5.9 66.0 2.8 9.5

9MFY11 1,902.8 1,610.2 292.6 15.4 98.7 70.4 14.8 1.0 139.4 41.2 98.2 5.2 4.7 93.4 4.9 13.4

% Chg 22.1 23.2 16.3 (80)bp 76.8 (12.2) (51.8) (20.3) (4.8) (26.7) (210)bp (29.4) (29.4)

Top line surprises positively


For 3QFY2012, on a consolidated basis, PEL posted net sales growth of 42.5% yoy, primarily due to good performance of its international subsidiaries. Order inflow for 3QFY2012 and 9MFY2012 continued to remain muted in-line with the weak trend of order inflow in the earlier quarters.

Exhibit 2: Consolidated top-line growth surprises


1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 (31.3) 30.4 30.6 32.8 15.2 37.6 28.0 24.1 9.2 26.0 33.4 23.8 7.7 42.5 50.0 40.0 30.0 20.0 10.0 0.0 -10.0 -20.0 -30.0 -40.0

Exhibit 3: Stable standalone top-line growth


1,400 1,200 1,000 800 600 400 200 0 (8.7) (16.3) 4.7 2.2 (11.0) 20.2 9.4 30.7 31.3 38.7 50.0 34.0 40.0 30.0 15.6 20.0 11.2 13.3 10.0 0.0 -10.0 -20.0

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY12

3QFY12

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY12

Sales (` cr, LHS)

Growth (yoy %, RHS)

Sales (` cr, LHS)

Growth (yoy %, RHS)

Source: Company, Angel Research

Source: Company, Angel Research

February 1, 2012

3QFY12

Patel Engineering | 3QFY2012 Result Update

Earnings under pressure


EBITDA margin came as a surprise at 18.0%, as international subsidiaries reported superlative margins of 19.5%. Therefore, reported PAT for the quarter grew by 104.8% yoy, despite a 63.4% yoy/14.1% qoq increase in interest cost. Going ahead as well, we believe earnings will continue to reel under pressure, given that the companys key segments (power and irrigation) are facing major headwinds (no major order inflows for the 9MFY2012) and the smoke does not look to get cleared in the near to medium term.

Exhibit 4: Volatility in margins continues


160.0 140.0 120.0 100.0 80.0 60.0 40.0 20.0 0.0 8.1 14.1 16.6 18.1 15.4 16.4 18.7 18.8 12.6 16.9 15.2 13.4 15.5 18.0 20.0 18.0 16.0 11.8 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0

Exhibit 5: PATM trend


80 70 60 50 40 30 20 10 0 2.0 5.7 7.6 7.2 5.0 5.7 7.3 7.6 6.0 5.7 5.7 9 8 7 6 2.3 2.1 3.2 3.2 5 4 3 2 1 0

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY12

3QFY12

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY12

EBITDA (` cr, LHS)

EBITDAM (%, RHS)

PAT (` cr, LHS)

PATM (%, RHS)

Source: Company, Angel Research

Source: Company, Angel Research

February 1, 2012

3QFY12

Patel Engineering | 3QFY2012 Result Update

Outlook and valuation


PELs core C&EPC business is currently facing headwinds with its large projects facing delays and a disappointing order inflow. Further, the longer gestation nature of the companys order book, macro headwinds and increasing debt levels put PELs growth visibility for the next few quarters under doubt. Hence, we maintain our Neutral rating with a fair value of `106/share. Key risks to our recommendation are: 1) pick-up in order inflow from the power segment in the near term; 2) earlier-than-expected execution from the companys slow-moving orders; and 3) raising of capital and the resultant decline in debt levels.

Exhibit 6: Derivation of SOTP-based fair value for PEL (FY2013E)


Business segment Core Construction Real Estate BOT Assets Power Venture Total CMP (`) Upside (%)
Source: Company, Angel Research

Methodology NAV/BV BV BV

Remarks ` cr `/share % to TP 54.7 16.7 15.7 19.3 108.0 (1.5) 51.4 15.7 14.7 18.2 100.0 50% Discount 117 1.0x P/BV 109 0.5x P/BV 135

P/E 5x FY2013E Const. Earnings 382

743 106.4

Exhibit 7: Angel EPS forecast vs. consensus


Angel forecast FY2012E FY2013E
Source: Company, Angel Research

Bloomberg consensus Variation (%) 14.8 15.0 0.5 (1.6)

14.9 14.8

Investment Arguments
Structural issues on the business front: PEL's core E&C business is currently facing strong headwinds, with its large projects facing delays and drying of order inflow for the last many quarters. Further, the longer gestation nature of its order book and increasing debt levels put the company's growth visibility for the next few quarters under doubt. Further, there is no clarity on the execution schedule of its 1,050MW thermal power project owing to pending clearances. Valuations: Given the sharp fall in the stock price in the past 12 months, PEL's valuations have come down drastically vindicating our negative stance on the stock. However, we are concerned about the growth prospects of the company and believe that it is facing structural issues, which will take time to be sorted out. Further, there are better plays available in the infrastructure space than PEL. Hence, we maintain our Neutral view on the stock. Key risks to our recommendation: 1) Pick-up in order inflow from the power segment in the near term; 2) earlier-than-expected execution from its slow-moving orders; and 3) raising of capital and the resultant decline in debt levels.

February 1, 2012

Patel Engineering | 3QFY2012 Result Update

Exhibit 8: Recommendation summary


Company ABL CCCL HCC IRB Infra ITNL IVRCL JP Assoc. L&T Madhucon NCC Patel Engg Punj Lloyd Sadbhav Simplex In. CMP 198 17 25 174 207 56 73 60 59 107 56 138 205 TP 245 Rating FY10 Buy 1,302 2,199 4,093 2,438 4,049 5,651 - Neutral - Neutral 182 Neutral 227 88 77 Accu. 56 Neutral Top line (` cr) FY11E 1,648 2,350 3,915 3,176 5,169 5,598 1,853 2,451 4,633 3,781 6,609 6,458 19.3 5.6 6.4 24.5 27.8 6.9 7.6 17.2 17.4 6.4 1.6 16.2 8.2 15.2 19.2 2.5 1.2 13.6 22.3 5.9 5.5 54.3 5.6 6.4 17.6 (5.4) 8.0 21.5 EPS (`) 21.7 (1.1) (3.1) 14.2 24.4 3.8 2.7 63.7 4.4 3.6 14.0 1.9 9.1 18.9 25.4 1.6 0.6 13.1 25.7 4.6 4.2 70.9 4.7 3.8 14.5 2.9 9.0 25.9 15.2 (20.5) (25.8) (2.0) 7.4 (11.5) (12.6) 14.2 (8.1) (22.4) (9.2) 6.0 9.8 10.4 6.7 21.3 12.8 9.3 9.5 13.3 24.8 10.8 9.3 6.1 17.2 9.5 Adj. P/E 9.2 12.3 8.5 14.9 26.7 21.1 13.5 16.6 7.7 29.5 15.0 10.8 7.8 10.6 38.7 13.3 8.1 12.1 17.4 19.0 12.7 15.4 7.4 19.3 15.3 7.9 OB/ 4.2 2.7 4.0 5.2 4.5 3.3 3.8 3.4 2.7 3.3 2.8 3.1 FY12E CAGR (%) FY10 FY11E FY12E CAGR (%) FY10 FY11E FY12E Sales(x)

Buy 13,832 13,763 16,017 Buy 43,905 53,779 60,258 Buy 1,816 5,074 3,476 7,850 2,209 4,889 1,952 5,095 3,271 2,602 5,562 2,503 5,749 3,586 2,585 6,485

1,345 1,608

59 Neutral - Neutral - Neutral 150 233 Accu. Accu.

9,585 10,592

Source: Company, Angel Research

Exhibit 9: SOTP break-up


Company ` ABL CCCL HCC IRB Infra ITNL IVRCL JP Assoc. L&T Madhucon NCC Patel Engg Punj Lloyd Sadbhav Simplex In. 104 17 4 116 59 37 31 1,276 23 31 55 47 81 233 Core Const. % to TP 42 100 12 64 26 66 35 79 30 52 51 100 54 100 ` 12 24 2 2 17 Real Estate % to TP 37 27 3 3 16 Road BOT ` 141 16 61 143 52 8 16 70 % to TP 58 51 34 63 68 14 15 46 4 19 332 Invst. in subsidiaries ` % to TP 2 34 21 18 19 25 33 Others ` % to TP 11 37 31 18 Total ` 245 17 32 182 227 56 88 1,608 77 59 106 47 150 233

Source: Company, Angel Research

February 1, 2012

Patel Engineering | 3QFY2012 Result Update

Profit and loss statement (Consolidated)


Y/E March (` cr) Net Sales Other operating income Total operating income % chg Total Expenditure Net Raw Materials Other Mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation& Amortisation EBIT % chg (% of Net Sales) Interest & other Charges Other Income (incl Ass/JV pft) (% of PBT) Recurring PBT % chg Extraordinary Expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) Less: Minority interest (MI) Prior period items PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) (Reported) Fully Diluted EPS (`) (Diluted) % chg FY2008 1,853 2 1,855 42.6 1,557 455 935 112 55 299 90.8 16.1 63 236 94.0 12.7 61 41 18.9 216 69.1 216 23 10.7 193 11 182 151 35.4 8.2 30.5 21.7 35.4 FY2009 2,460 2,460 32.6 2,070 427 1,471 128 44 390 30.5 15.8 120 270 14.5 11.0 137 62 31.9 196 (9.5) (41) 237 44 18.4 193 13 181 139 (8.1) 5.7 30.2 19.9 (8.1) FY2010 3,191 3,191 29.7 2,682 398 2,011 136 138 509 30.5 15.9 109 400 47.9 12.5 192 98 32.0 305 55.8 305 93 30.5 212 14 198 198 42.4 6.2 30.2 28.4 42.4 FY2011 FY2012E FY2013E 3,476 3,476 8.9 2,979 461 2,212 115 191 497 (2.2) 14.3 82 415 3.9 11.9 284 89 40.4 220 (27.9) 220 54 24.6 166 8 158 123 (38.1) 3.5 22.6 17.6 (38.1) 3,573 3,573 2.8 3,094 786 2,123 179 7 479 (3.6) 13.4 82 397 (4.3) 11.1 331 98 59.6 164 (25.5) 164 53 32.5 111 7 104 104 (15.3) 2.9 14.9 14.9 (15.3) 3,609 3,609 1.0 3,137 794 2,156 180 7 472 (1.5) 13.1 90 382 (3.9) 10.6 332 107 68.3 157 (4.2) 157 47 30.0 110 7 103 103 (0.7) 2.9 14.8 14.8 (0.7)

February 1, 2012

Patel Engineering | 3QFY2012 Result Update

Balance sheet (Consolidated)


Y/E March (` cr) SOURCES OF FUNDS Equity Share Capital Preference Capital Reserves& Surplus Shareholders Funds Minority Interest Total Loans Deferred Tax Liability Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Investments Current Assets Inventories Sundry Debtors Cash Loans & Advances Other Current liabilities Net Current Assets Misc. Exp. not written off Total Assets 615 180 435 235 36 2,045 824 462 288 471 658 1,387 2 2,096 804 303 500 70 50 2,865 1,110 583 295 878 692 2,174 6 2,800 861 306 555 204 70 3,758 1,803 696 232 1,026 1,020 2,738 7 3,574 1,008 364 644 209 78 4,548 2,039 872 243 1,306 88 1,170 3,378 8 4,317 1,108 446 662 259 278 4,701 2,283 1,003 109 1,306 1,397 3,304 8 4,512 1,233 537 697 309 428 5,019 2,283 1,103 65 1,567 1,669 3,350 8 4,792 6 840 846 41 1,194 15 2,096 6 1,011 1,017 22 1,747 15 2,800 7 1,356 1,363 62 2,138 11 3,574 7 1,421 1,428 70 2,806 13 4,317 7 1,516 1,523 70 2,905 13 4,512 7 1,610 1,617 70 3,092 13 4,792 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

February 1, 2012

Patel Engineering | 3QFY2012 Result Update

Cash flow statement (Consolidated)


Y/E March (` cr) Profit before tax (excluding MI) Depreciation Change in Working Capital Less: Other income Direct taxes paid Cash Flow from Operations (Inc.)/ Dec. in Fixed Assets (Inc.)/ Dec. in Investments Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY2008 FY2009 FY2010E FY2011E FY2012E FY2013E 186 63 396 41 45 (234) (482) (2) 41 (443) 703 8 165 860 183 105 288 237 120 663 62 76 (444) (15) (51) 62 (4) 536 6 (75) 455 7 288 295 291 109 627 98 108 (433) (295) 21 98 (176) 344 391 23 (166) 547 (62) 295 232 212 82 629 89 54 (478) (152) (8) 89 (71) 668 8 (100) 560 11 232 243 157 82 61 98 53 28 (150) (200) 98 (252) 99 9 90 (134) 243 109 150 90 89 107 47 (3) (175) (150) 107 (218) 186 9 177 (44) 109 65

February 1, 2012

Patel Engineering | 3QFY2012 Result Update

Key ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Order Book to Sales Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value DuPont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROACE (Pre-tax) Angel ROIC (Pre-tax) ROAE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage 1.1 3.0 3.9 1.4 3.7 2.0 1.4 3.7 2.1 1.8 5.2 1.5 1.8 5.8 1.2 1.9 6.4 1.1 3.8 125 75 100 176 3.5 144 77 99 221 3.8 167 73 95 251 3.7 202 82 110 296 3.4 221 96 126 323 3.1 231 107 150 328 14.2 16.2 19.5 11.0 12.5 14.9 12.5 13.7 16.7 10.5 11.2 8.8 9.0 9.4 7.0 8.2 8.4 6.6 12.7 0.9 1.3 14.4 6.4 0.8 21.1 11.0 0.8 1.1 10.2 7.6 1.3 13.5 12.5 0.7 1.1 9.5 6.9 1.4 13.2 11.9 0.8 0.9 8.4 8.7 1.6 8.1 11.1 0.7 0.8 6.3 7.8 1.8 3.6 10.6 0.7 0.8 5.9 7.8 1.9 2.3 30.5 21.7 30.7 1.5 121.1 30.2 19.9 37.0 1.7 145.7 30.2 28.4 44.0 2.0 195.2 22.6 17.6 29.3 1.0 204.5 14.9 14.9 26.6 1.1 218.1 14.8 14.8 27.7 1.2 231.5 5.0 3.5 0.9 1.4 0.9 5.6 0.8 3.1 5.4 2.9 0.7 1.6 0.9 5.7 0.8 2.9 3.8 2.5 0.6 1.9 0.8 5.2 0.7 3.1 6.2 3.7 0.5 0.9 1.0 6.7 0.8 2.7 7.3 4.1 0.5 1.0 1.0 7.4 0.8 2.1 7.3 3.9 0.5 1.1 1.0 8.0 0.8 2.2 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

February 1, 2012

Patel Engineering | 3QFY2012 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Patel Engg. No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors.

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

February 1, 2012

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