Professional Documents
Culture Documents
1. Introduction 02
2. Basic Framework 03
3. Market Dynamics 05
4. PEST Analysis 15
5. Competitive Landscape 18
6. Industry Outlook 26
7. Bibliography 27
1. INTRODUCTION.
The construction industry is the second largest industry of the country after
agriculture. Construction activity is an integral part of a country’s infrastructure and
industrial development. It includes hospitals, schools, townships, offices, houses and
other buildings; urban infrastructure (including water supply, sewerage, drainage);
highways, roads, ports, railways, airports; power systems; irrigation and agriculture
systems; telecommunications etc. Covering as it does such a wide spectrum,
construction becomes the basic input for socio-economic development. The
construction industry is the infrastructure of the infrastructure industry. Besides, the
construction industry generates substantial employment and provides a growth
impetus to other sectors through backward and forward linkages. It is, essential
therefore, that, this vital activity is nurtured for the healthy growth of the economy.
The construction sector has major linkages with the building material
industry since construction material accounts for sizeable share of the construction
costs These include cement, steel, bricks/tiles, sand/aggregates, fixtures/fittings,
paints and chemicals, construction equipment, petro-products, timber, mineral
products, aluminum, glass and plastics.
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2. BASIC FRAMEWORK
• The second involves heavy and civil engineering construction such as utility
systems , land subdivision, and highways, streets, and bridges.
Firms in these first two sectors are primarily engaged in contracts that
include responsibility for all aspects of individual projects and are commonly know as
general contractors.
Specialty trade contractors usually do the work of only one trade, such as
painting, carpentry, or electrical work, or of two or more closely related trades, such
as plumbing and heating. Beyond fitting their work to that of the other trades,
specialty trade contractors have no responsibility for the structure as a whole. They
obtain orders for their work from general contractors, architects, or property
owners. Repair work is almost always done on direct order from owners, occupants,
architects, or rental agents. Houses, apartments, factories, offices, schools, roads,
and bridges are only some of the products of the construction industry.
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2.2 The major construction industry sectors can also be classified as follows:
A construction project must fit into the legal framework governing the
property. These include governmental regulations on the use of property, and
obligations that are created in the process of construction.
3
and welfare measures and for other matters connected therewith or incidental
thereto.
The Building & Other Construction Workers’ Welfare Cess Act of 1996
provides for the levy and collection of a cess on the cost of construction incurred by
employers with a view to augment the resources of the Building & Other
Construction Workers’ Welfare Boards constituted under the Building & Other
Construction Workers (Regulation of Employment and Conditions of Service) Act,
1996. It extends to the whole of India and came into force on the 3rd day of
November, 1995.
The National Building Code is a single document in which, like a network, the
information contained in various Indian Standards is woven into a pattern of
continuity and cogency with the interdependent requirement of sections carefully
analyzed and fitted in to make the whole document a cogent continuous volume. A
continuous thread of preplanning is woven which, in itself, contributes considerably
to the economies in construction particularly in building and plumbing services.
4
3. MARKET DYNAMICS
Statistics over the period have shown that compared to other sectors, this
sector of economic activity generally creates 4.7 times increase in incomes and 7.76
times increase in employment generation potentiality. Sustained efforts by the
Indian construction industry and the Planning Commission have led to assigning the
industry status to construction today. This means formal planning and above board
financial planning will be the obvious destination of the construction sector in the
country, with over 3.1 Crore persons employed in it.
Ø Public-private partnerships
5
Under the VGF scheme, twenty three projects with project cost of Rs.
11,114.7 crore have been given in principle/final approval involving an estimated
Viability Gap Funding of Rs. 2,690.3 crore. IIFCL has so far approved 64 credit
proposals involving assistance from IIFCL amounting to Rs.14,966 crore. For
providing financial support for quality project development activities to the States
and the Central Ministries, a corpus fund titled India Infrastructure Project
Development Fund (IIPDF), with initial outlay of Rs. 100 crore is being set up.
The core demographic variables are population size and population growth:
the more people in the economy, the greater the demand for housing. it is
households that demand housing services: typically one household per house. The
size and demographic composition of households is variable and not entirely
exogenous.
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From an external point of view, housing is being considered more and more
as an asset by international investors as well as by Indians residing abroad. This is
attracting a large amount of international investments and expatriate funds into the
housing sector. From an internal point of view, the economic growth is leading to
rapid urbanization and creation of a new middle class. This along with changing
social norms leading to nuclear families and the decreasing age of individuals
purchasing houses are fuelling demand for housing.
It is expected that the household size will continue to decline in the next 10
years. As per industry estimates, average age of a home buyer has decreased from
42 years to 31 years. The younger generation is creating further demand for
residential units and the trend should continue as the income generation capability
of the Indian youth grows. The diagram below is a summarized illustration of the key
factors that are driving housing demand in India.
The demand for the housing, commercial buildings is very high; but the
supply is limited. The urban population is increasing very rapidly. Due to various key
drivers of growth listed above causing the market demand to increase more and
more. It has been analyzed that residential prices have increased by about 15- 20%
on average in the last one year. There has been strong growth in demand supported
by rising disposable incomes, low interest rates, and fiscal incentives on both interest
and principal payments and increasing urbanization. In 1995 EMI (Estimated Monthly
Installments) as a part of salary was 54% as compared to 28 % in 2005. Also, as per
industry estimates, the average age of a house buyer has fallen from 42 to 31yrs.
Another area where the demand far outstrips supply is the urban
infrastructure amenities. The government is stressing on large capacity addition in
various segments of the sector. Urban transportation, water supply and housing are
some of the key areas. Other than a huge plan outlay, private participation is also
considerable. Special Economic Zone development is also an area to look out for.
Construction industry is moving towords a stage where the major players are
well defined. The playes like L&T,Jaypee etc are big companies undertake the major
engineering and construction projects like Dams, Tunnels, Power plants, Heavy
construction etc.This creates the huge demand for limited players.
The prices of real estate in the urban india is very high, which will require
companies to have more capital so as to acquire new lands and develop them. The
big players can survive and will be few in numbers with well defined teritories of
operation. The demand in metro cities is perfectly inelastic,with certain well defined
competition will create huge boom for the operating companies.
The small or local players who are in huge nos. are restricted to local
geography only but it will not easy to expand to other teritories. The industry is now
moving towords consolidation. The increase urbanisation will leads the local players
also a great opportunity to serve the huge demands of people.
The Government has allowed 100 per cent foreign direct investment in the
construction industry through the automatic route. Conditions restricting FDI to a
minimum area of 100 acres and 2,000 dwelling units are relaxed to 25 acres and
50,000 square meters for construction development projects.
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The decision ensured that FDI was "construction-centric" rather than “land-
centric" in the past. Foreign investors could now come in any area but would have to
construct at least 50,000 square meters within a timeframe so that they did not hold
land for speculative purpose.
Ø Project Export
The Indian construction industry has been very active in the overseas
markets, especially in the Gulf during the 1970s and 1980s when Indian companies
ventured there to meet the demand of construction activities generated by the oil
boom. Between 1975 and 1980, Indian companies handled construction work
amounting to nearly US $5 billion. But this trend did not last and by the late 1980s,
the volume of contracts secured fell sharply. In 1996-97, the value of project export
was Rs. 338 crore (US$ 95.2 million), which increased to Rs. 1,500 crore (US$ 346.2
million) in 1999-2000.
Over past few years, the Indian economy continued on its robust growth path
with the overall growth in real gross domestic product at factor cost estimated at 9.4
per cent (in 2006-07). India was the second highest contributor to world growth in
2006. Sustained high growth over the last four years has made India the third largest
economy after USA and China with its share in world GDP rising from 5.5 per cent in
2002 to 6.4 per cent in 2006.
The strong growth prospects of the Indian economy, high returns on equity
and higher interest rates coupled with rise in global private capital flows, have
resulted in hue growth of construction industry.
9
has given a boost to construction industry. The mall space construction has shown
substantial which can be seen from the graph.
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16 22
2 7
The average real income of urban India and rural India is likely to grow by
5.7% and 3.6% respectively by 2025. Moreover, India’s middle class is expected to
expand by more than 10 times from its current size of 50 million to 583 million
people in next 18 years.
Therefore, all these estimates work out to make a strong case for higher
home loan GDP ratio so that India and its population is able to keep a pace for
meeting the demand for housing units.
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Ø Booming IT&ITES Sector
Almost 30-40 per cent of the land acquirers have been IT companies. Not
only are new companies looking at setting up shop, but the existing companies such
as IBM and Microsoft are also expanding.
The IT corridor along the Sarjapur Ring Road is also buzzing with activity, with
companies such as Intel purchasing 43 acres of land and Hughes Software signing for
a 1,10,000 sq. ft. built-to-suit facility, with an option to expand.
The report said that Gurgaon still remained a preferred destination for
corporates that wanted space in Delhi. Some prominent transactions included the
lease of approximately 51,000 sq. ft. by Hewlett-Packard in the Global Business Park,
36,000 sq. ft. by Convergys in Orchid Square, 1,34,000 sq. ft. by Hewitt Associates in
DLF Center Court and 8,500 sq. ft. by Louis Berger.
Apart from the IT and ITES industry influencing the Indian real estate sector,
India is also getting into the knowledge based manufacturing industry on a large
scale. Retail, one of India's largest industries, has presently emerged as one of the
most dynamic and fast paced industries of our times with several players entering
the market.
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industry experts are to be believed, the prospects of both the sectors are mutually
dependent on each other.
As of 2004, about 53% of the population in the country is less than 25 years
of age. This compares favorably with China where the comparable number is 42%.
According to Asian Demographics Report, the 20-54 years age bracket is growing
faster than the rest of the population and will represent more than 50 % of the
population in 2013.
The field of Indian real estate has proved so lucrative that most of the Indian
as well as foreign companies namely: Global–RMZ, Godrej Properties, Emami, ETA
Star, GE Commercial Finance, JM Financials, India Bulls Real Puravankar, Reliance
Industries Ltd (in Hotel business), Ambuja Realty, Liberty International (a British
property group), DCM Shriram etc., etc., have also jumped into this arena as the
results of investment in Indian real estate extremely overwhelming which showed fly
by night fast multiplication of capital. Buy property in India is also suitable for
investors due to emerging new renting system. After buying a house, one gets a well
paying renter. A new, modern concept and a new thinking differs from others are
making unique in India.
Impact of each of these factors when looked upon in isolation may not be
significant, but when viewed in totality they offer enormous potential for housing
market growth. Rising income levels in combination with a reduction in average
population age has over the years resulted in the fall of average age of a house
buyer. Analyst expects the trend to sustain in due course of time.
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3.4 MAJOR ISSUES & IMPLICATIONS
The construction industry has registered annual growth of over 10% for past
five years; however this growth has come despite several issues relating to
contracting quality technology, manpower, regulations etc. Some corrective
measures have been adopted to address these problems and overruns in project
execution have dropped from an average of 167% in 2001 to 64% in 2005. Some key
issues and possible remedies are discussed below.
Ø Contract Procedures
The Present contract Procedures for procurement of contractors are highly
cumbersome and expensive for both the project owner as well as contractors. The
Key steps involved in contract procurement process are project detailing,
prequalification documents, invitation of bids, evaluation, and final award of work.
The above activities account for up to 16% of the project cost. Further adding
supervising and monitoring cost about 6% therefore total cost of 22% of asset
created.
There is need for standard contract procedures and evaluation criteria must
be place as model contract. The Grading system for contractors, adaptation of
technology in bidding process like Online tenders etc. must be adapted.
Ø Manpower Shortage
Ø Title Clearances
Title clearance in India is a complicated process in the absence of a central
database of properties. This could also add to the cost and delays in a project.
13
Ø Procedural & Legal Vulnerability
Many cities have created development agencies (like the DDA in Delhi) and
handed over control of all urban land within the municipal jurisdiction to them in the
belief that they would act in the interests of the public. However, such agencies tend
to behave like the monopolies that they are. It is in the interests of the monopolist to
restrict the development and sale of new land and keep prices high, so as to
maximize its own returns. Introduction of a competitive construction boom requires
abolishing the monopoly of such agencies over urban land by completely separating
control of land from its development.
Section 80-IA of the Income-tax Act provides that where the gross total
Income of an assessee includes any profits and gains derived by an undertaking or an
enterprise from any of the business referred to in sub-section (4) then a deduction
equal to 100% of the profits and gains derived from such business shall be allowed
for ten consecutive assessment years.
Sub-section (4) covers the business of either developing or/and maintaining
or/and operating or any infrastructure facility. As the Income Tax deduction to
developers under this section was available for projects approved before 31st day of
March 2007 and the date was not extended in finance bill 2007, the concession
available under this section for projects sanctioned after 31st day of March 2007 has
ceased.
Ø Infrastructure Bottlenecks
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4. PEST Analysis.
SEZ is the new destination for real estate investors. Currently 150 SEZs are
approved out of which 85 SEZs are in the IT/ITES area and 10-15 SEZs in the
electronics area.130 SEZs are developed by real estate developers which constitute
of about 50% of the total SEZ area. IT SEZ should be developed and made
operational within the period of six months from the date of notification. Thus, 130
approved SEZs would result in investment of US$10 bn to US$ 12 bn immediately.
The proposed introduction of REMF (Real Estate Mutual Fund) and REIT (Real
estate Investment Trust) will boost real estate investments from the small investor’s
point of view. This will allow small investors to enter real estate market with
contribution as less than Rs 10,000. The concept of REIT is on the verge of entering
India and would be structured as a company dedicated to owning and in most cases
operating income producing real estate such as apartments, shopping centers,
offices & warehouses.
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4.2 ECONOMIC FACTORS.
It has been analyzed that residential prices have increased by about 15- 20%
on average in the last one year. There has been strong growth in demand supported
by rising disposable incomes, low interest rates, and fiscal incentives on both interest
and principal payments and increasing urbanization.
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tremendous potential for construction of green buildings in India. The estimated
market potential for green building will be about $ 400 million in 2010.There will be
favorable policies of the government would provide the right impetus for advancing
the green building movement in India.
The Ready mix concrete business in India is in its infancy. For example, 70% of
cement produced in a developed country like Japan is used by Ready Mix concrete
business there. Here in India, Ready Mix concrete business uses around 2% of total
cement production.
Much of construction done in India is very slow paced. The concrete making
process at site takes much time with variation in quality. The increasing use of ready
mix not only saves on time but allows the better quality. It will also eliminate the
storage space at site, eliminate Procurement / Hiring of plant and machinery, reduce
wastages of basic material, noise and dust at site will be reduced. Also organization
at site will be streamlined. This will improve the rate at which infrastructure can be
built in India.
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5. COMPETITIVE LANDSCAPE
In the first five-year plan, construction of civil works was allotted nearly 50
per cent of the total capital outlay. The first professional consultancy company,
National Industrial Development Corporation (NIDC), was set up in the public sector
in 1954. Subsequently, many architectural, design engineering and construction
companies were set up in the public sector (Indian Railways Construction Limited
(IRCON), National Buildings Construction Corporation (NBCC), Rail India
Transportation and Engineering Services (RITES), Engineers India Limited (EIL), etc.)
and private sector (M N Dastur and Co., Hindustan Construction Company (HCC),
Ansals, etc.).
5.1 STRUCTURE
The Indian construction industry comprises 200 firms in the corporate sector.
There are thousands of small contractors, which compete for small jobs or
work as sub-contractors of prime or other contractors.
Total sales of construction industry have reached Rs. 42885.38 crores in 2004
05 from Rs. 21451.9 crores in 2000-01.
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Ø Order Backlog at end of June 2007 (Rs crore)
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• Capacity Expansion
HCC is distinguished by its boldness of vision and the courage and confidence
it displays in taking on the toughest of challenges. HCC executes the construction of
technically complex and high value projects across segments such as Transportation,
Power, Marine Projects, Oil and Gas Pipeline Constructions, Irrigation and Water
Supply, Utilities and Urban Infrastructure.
In Transportation, HCC has to its credit more than 300 road and rail bridges,
expressways & roads and marine construction. It has built over 100 Environmental
Engineering projects. In addition to all this, it has also built some of India's best-
known industrial structures.
As a part of its future growth strategy, the company is planning to enter into
collaborations with other companies to bid for projects where pre-qualification
requirements can be met jointly.
Ø JAIPRAKASH ASSOCIATES
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hydropower projects spread over 6 states in India and Bhutan to generate 10,290
MW of power. The group has hydro power project orders worth Rs. 9000 Crores.
• Expansion Plans
Ø GAMMON INDIA
Gammon India Limited, the only Indian Construction Company to have been
accredited with ISO 9001 certification for all fields of Civil Engineering Works
including design, stands out as gateway for Technological and Engineering excellence
in Civil Engineering fields
Early entry into identified growth areas in the various infrastructure sectors
within which it operate provides with a head start in each such sector. It also intends
to continue to pursue the advantages associated with early entry in order to achieve
a dominant position within such sectors. By adopting this strategy, it will able to
realize specific advantages of higher margins in certain identified sectors and the
flexibility to grow and allocate its resources to sectors that offer more attractive
margins.
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5.4 FINANCIAL SCENARIO
Financial requirements can be fund based or non fund based. Fund based is
Loans or equity for purchasing materials, equipments, salaries , working capitals etc.
Non fund based includes payment of bank guarantee, advances for mobilization of
purchases, insurance covers etc. Fund based financing has picked up due to private
participation. No construction company of today can survive without access to
commercial credit. Some of financial need of this industry is as follows:
• Banks and financial institutions did not have proper lending norms in place.
There is also delay in release of working capital to contractors.
• There is need to simplify bank guarantees and raise share of bank finance.
The share of industry in non food bank credit is less than 5%. The banks also
charge commission ranging 2 to 3% as compared to 0.2% internationally.
• Lenders are unwilling to lend as they don’t have risk assessment, credit rating
systems. CIDC has put such a system with ICRA. But lots of small contractors
are not graded.
• There is need to introduce new construction specific insurance products. The
risks are higher. Very few policies as machinery policy, all risk policy,
compensation policy etc are available. Overall these policies do not cover all
aspects of complexities in construction.
• Since 96% companies are SMEs, SIDBI introduced schemes which has
improved financing scenario.
• A national level bank to meet the requirement of contractors must be
established. The unavailability of short term bridge finance and an absence of
a system of factoring bills add to the woes of small contractors.
• Construction equipments accounts for nearly 20% of typical project costs.
Small contractors cannot afford to purchase those. The solution lies in
creating Bank for equipments. One of such initiative is Quipo infrastructure
Equipment bank.
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5.5 FINANCIAL PERFORMANCE
Swelling order book positions and conversion of the same into revenues has
helped construction companies to sustain growth momentum. Sales growth which
vacillated in the range of 15-20 per cent in the earlier quarters accelerated to over
30 percent in the March and June 2007 quarters.
The construction industry has started to feel the pinch of rising borrowing
costs. After a 31.5 % rise in the March quarter, interest cost grew by a sharp 45%
during the June quarter. However a higher other income cushioned net margins of
the sector which healthily expanded year on year from 5.5% to 7.3%. (Refer
Annexure-I&II)
The sectoral index recorded a healthy 12.7% returns and posted excess gains of 7.4%
vis-à-vis the Overall share price index. Reckoned month-on-month, about 70% of
companies posted positive returns.
L&T the largest company by market capitalization continued its upswing. The
scrip touched 52 week high of Rs. 2735 on 24 July 2007 and was up 18.7 % during the
month. L&T registered a 30% rise in revenues to Rs. 4505 crore during June 2007
quarter.
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No. of shares Trading
Mkt. cap Returns P/E
traded volume Beta
(Rs. Crore) ( %) (Times)
(Lakh nos.) (Rs. Crore)
L&T 74108 18.7 247.0 6039.8 45.7 0.98
Jaiprakash 18239 13.1 245.6 2020.5 39.4 1.36
Aban Offshore 11168 0.4 21.8 672.4 109.0 0.85
Punj Lloyd 7417 10.5 407.1 1118.3 124.5
Lanco Infratech 5327 16.4 410.6 957.7 64.9
Apil 5205 -2.6 85.8 711.3 45.1 1.31
IVCRL 5012 7.5 540.8 2129.3 31.5 1.43
Nagarjuna 3999 7.8 360.5 710.3 23.5 1.51
Gammon India 3858 7.2 58.6 129.7 35.8 0.87
HCC 3562 12.8 420.5 547.4 36.4 1.45
Construction 160686 12.7 3712.3 17042.3 42.2 1.17
Industry
Source: Indian Industry a monthly review: CMIE (July 2007)
Assuming that you bought this stock at the closing price on 01-02-
2005 on the BSE, your gain on 31-01-08 is 654.42%. If you had bought on the
NSE, your gain would be 653.42%.
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Ø Jaiprakash Associates
Assuming that you bought this stock at the closing price on 01-02-2005 on
the BSE, your gain on 31-01-08 is 884.43%. If you had bought on the NSE, your gain
would be 883.16%.
Assuming that you bought this stock at the closing price on 01-02-2005 on
the BSE, your gain on 31-01-08 is 382.86%. If you had bought on the NSE, your gain
would be 383.1%.
Ø Gammon India
Assuming that you bought this stock at the closing price on 01-02-2005 on
the BSE, your gain on 31-01-08 is 268.89%. If you had bought on the NSE, your gain
would be 268.57%.
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6. INDUSTRY OUTLOOK
One key trend that has been observed in past few years and growing is that
foreign companies have begun to enter India either on their own or as joint ventures
with Indian companies there are massive investments expected and it will be good
for these companies to do business in India.
Apart from this the foreign manpower is coming and working India. Recent
case of Reliance invited the Chinese workers to come and work in India and
government permitted them to do so.
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10. BIBILOGRAPHY
Ø Indian Industry: A Monthly review, Centre for Monitoring Indian Economy (August
2007)
Ø Chapter 7.7 – Construction - Planning Commission, Govt. Of India, Tenth Five Year
Plan.
Websites:
Ø www.indiaenews.com/business/20071114/80632.htm
Ø www.equitymaster.com/research-it/india-economy/budget2004/cement.asp
Ø http://planningcommission.nic.in/plans/planrel/fiveyr/10th/volume2/v2_ch7_7.pdf
Ø www.cidc.in/News_Letter/NL_29.pdf
Ø construction.indianetzone.com/1/national_building_code.htm
Ø www.lntecc.com/home.htm
Ø www.hccindia.com/index.asp
Ø www.thehindubusinessline.com/2003/07/29/stories/2003072901480400.htm
Ø www.iitk.ac.in/nicee/RP/2004_Challenges_Construction_Industry_Proceedings.pdf
Ø www.iimcal.ac.in/community/consclub/ppts/cementAndConstruction.ppt
Ø www.greenbusinesscentre.com/images/photos/7.pdf
Ø www.lntecc.com/concrete/aboutreadymix.asp#present
Ø http://www.moneycontrol.com/stocks/companydetails/histdata.php
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