Last couple of months, especially last 6 weeks we were busy in reinventing our performance ratings. If you are new to our blog then let me briefly explain you that we rate each stock with our quality (A,B and C) ratings accompanied with its performance (1 and 2).

So when we say that we rate XYZ Company as ‘A1’, means its ‘A’ quality stock and in performance section it is ranked as number ‘1’.

We believe in concentrated portfolio and to me concentrated means well refined quality stocks. The methodology or our investment model is designed after studying 40 years of experience and information on Warren Buffett, Walter, Ben Graham, Chandrakant Sampat and Charlie Munger. The whole model is tested in various developed and developing countries like Australia, London, Sinapore, New Zeland and India and we have witnessed that it works in every country. It is just a matter of punching numbers in our model and you get the results.

What we have done now is we have added two more ranks in our performance rating and also added performance ratings to ‘C’ quality companies to help us track every small move in performnce of each individual stock.

So our new quality and performance ratings are A1, A2, A3, A4, B1, B2, B3, B4, C1, C2, C3 and C4. We still think that only A1, A2 and B1 stocks are the investment quality stocks. More value is being added to our model with the help of quality team which have worked day and night to rebuild our performance ratings.

As we are talking about our quality and performance rating, we thought to share our disclaimer in regards to that once again with you all to refresh our memories and get better understanding.

Something to remember about quality and performance ratings…

Rated A(1-4), B(1-4) and C(1-4), every listed company is rated based on a series of over 30 separate metrics, measured at both a point in time and over time. Most importantly, the Quality and Performance Rating is applied without any subjectivity. All companies are judged according to the metrics they generate. A1s have the lowest probability of a liquidation event. “Lowest probability” however doesn’t mean a liquidity event won’t occur. It just means far fewer A1s will have a liquidity event imposed on them compared to C (1-4). A liquidity event includes a capital raising, debt default or renegotiation, administration, receivership etc. An A (1-4) company could of course raise capital if it needs to fast track construction of a new factory. Sticking to A1s and avoiding C’s should, over time, produce better returns.

This change in our model has segregated quality A2 companies from A3 and A4. There are 30 A1 and 65 A2 rated companies and to my discretion here is the list of companies in my radar for 2012.

Names

Quality and Performance Rating

Astrazenca Pharmacy

A1

Fag Bearings India

A1

Gandhi Special Tubes

A1

Glodyne Technoserve

A1

Grindwell Norton

A1

ONGC

A1

Wendt India

A1

Alfa Laval India

A1

Greaves Cotton

A1

ITC

A1

Bliss GVS Pharma

A2

CRISIL

A2

Eclerx Services

A2

Gateway Distriparks

A2

Hindustan Copper Ltd

A2

Infosys Systems

A2

JB Chemicals & Pharmaceuticals

A2

Swaraj Engines

A2

TCS

A2

TTK Prestige

A2

Vesuvius

A2

Foseco India Ltd

A2

Lakshmi Machine Works

A2

Merck Ltd

A2

It is very important to understand that only quality and performance rating should not qualify the above list to invest with. You still have to do further research on its future prospects, look if they have quality management and most importantly do they have competitive advantage that can sustain their returns in the future.

Many of the above names you will never hear from any brokerage firms to invest in them. The reason I can think back of my mind is because they are not traded too often. For example Gandhi Special Tubes, if you look at this business variables then it ticks all of them. If you are happy with its prospects, management and can identify its competitive advantage then it’s a great buy.

Talking about the same business there are hardly any sellers on NSE market. The only negative thing we discovered in this business is that they have not created any value for shareholders in current year. The expected value for March 2012 is same as it was in March 2011. This translates a poor performance by this business for this year till date.

Brokers won’t recommend that stock because they make money when you trade and follow their guidance. This stock is yet to be discovered by brokers and get into their popularity list.

There are many good companies rated as A2 companies which has potential to transform from A2 to A1 list. For example CRISIL has clean Balance sheet and good profitable business and reputable brand in financial market. The only variable they have to improve is their operating cash flow which is not up to the standards as other variables. The other thing is its price which is trading at such a premium to its value that if I owned these stocks I would be selling it.

The only stock today I am interested to buy from above list is ONGC and FAG Bearings. I have talked a lot about ONGC in past one year so let me take this opportunity to talk about FAG Bearings.

The very first thing I do is look at its competitors and where this business stands as per market capitalisation with its peers. FAG ranks second within its peers as per market capitalisation, but ranks as only A1 Company within its peers as it has clean and best variables we look for in any business.

As of Dec 2010 final results the actual intrinsic value for this business was Rs 920 per share. The return on equity they reported for that year was 23%. Today we expect that for the year Dec 2011 they will report return on equity of 25% and that translates value of this business to Rs 1,180. We expect this value to grow around Rs 1,575 levels by this year end.