Punishment doesnt fit the crime

This company reminds me of the Aerosmith's song (Hole in my soul)..

..I'm down a one-way street
With a one-night stand, With a one track mind
Out in no-mans land
The punishment sometimes dont seem to fit the crime..

Market punishments are often too harsh. And this time its warth is on Patni - one of the infamous underdogs in the present markets.

Its well financed, sitting on around 1300c of cash. Over last three years, they have grown 24% on operating-cash-profits-after-workin-cap-changes. They havnt done well over past 6 or so quaters, and maybe therefore markets are not liking it. Price is fallen over 60% over past years - market is ignoring that the co did well till very recently and mr market is now dictating a life of only only 3 years to the company.

There are some clouds over muted growth, succession in the co, INR appriciaton , slowdowns & general negativity on sector, but I think we are paying too low for this decent sized company and downside looks protected. Let me explain..

Its being valued at 3700c - debt free, sitting on 1300c of liquid investments. Plus have their own land/buidling assets, which many IT companies dont have, as many operate on leased office spaces.

• In worst case, if things start going down the drain, US recession hits them hard or mgmt is not able to manage the company well or family successsion problems arise, stock should crash to anywhere north of 180 rs/share (considering about Rs100/share of cash + Rs 30-35 internal generation for a year + land assets which I roughly conservatively value at rs 40-50/share) - and mgmt may throw in the towel and decide to exit at asset cost.
• In best case, they can be a good acquisition target for anyone - they got 15000 employees! So may fetch decent premium if put on the table.
• As going concern they are still doing anywhere between 400-500c of cash profits - which is like Rs 30/share.

On Relative basis, its one of the companies which have fallen the most in the entire sector. Infy has gone from peak to present of 29x to 15x multiples (mkt cap / operating profits multiples). Patni on the other hand has fallen from 20x to 4x (peak to present)

There is also a buyback offer from the management on the table. The company has offered to buyback its shares from the open market at max price of Rs 325, and has allocated nearly Rs 240c, which I think should give a temporary downside protection to the price. Anyways, if price does fall down, and company buys at lower cost, it will enhance the remaining shareholders' value; if it goes up, very well..

The best part is that with fall in earnings, the PE multiples also collapse - and vice versa happens on the rise. In this, we are getting free option on the upside. If things turn out to be well, we will make multi-bagger; if things turn sour, we are buying at the hard-asset cost.