Blue Chip Stocks: Which Indian Stocks are Good for Long Term Investing?

Blue chip stocks are shares of outstanding companies.

Not many company can earn the tag of being a blue chip stock.

For the stock market, these stocks are like what Grandmasters are for the game of Chess. [Ready list of blue chip stocks...]

There are no doubts that these are good stocks which one cannot afford to miss investing in, but

Blue Chip Stocks India - Expensive Stocks

But a major downside of blue chip stock is that, they often trade at very high price levels.

They are the stock market’s most expensive stocks.

Expensive Stocks

Generally speaking, blue chip stocks are most expensive stocks of the market.

But why I’m calling the above stocks as expensive just by looking at their market price? There should be more check points, right?

Yes, let’s double check if the above stocks are really expensive. How?

By also looking at their P/E numbers…

Blue Chip Stocks India - Expensive Stocks with PE

Blue chip stocks are worth buying?

If these stocks are so expensive, is it worth buying them? Yes and No.

  • Yes, because they represent high quality companies.
  • No, because they may yield minimal returns if bought at current price levels.
Blue Chip Stocks India - Pros and Cons

Why minimal returns? Because at current price levels they are already overvalued.

Why they are overvalued? Because their demand is high.

Blue chip stocks are popular, everyone wants to have them in their portfolio.

Am I confusing you about blue chip stocks?

Sorry, it was necessary to highlight the negative aspect of blue chip stocks (tendency to remain at overvalued price levels).

Now, allow me jump to the positive aspects of blue chip stocks…

How to Screen Blue Chip Stocks?

But have we not already seen how to screen blue chip stocks? High market price and high P/E multiples…

Yes, this may be shortcut to screen blue chip stocks. But one must ask an important question first…

What has made these stocks so expensive (specially high P/E)? What made them blue chips in first place?

It is the strong business fundamentals of the company which makes its stocks blue chip.

Why to go into the hassle of evaluating business fundamentals?

Because it will give us a formula to identify “potential blue chip stocks”.

What I mean by potential blue chip stocks?

Stocks which are not blue chip today but may become one soon, due to their strong business fundamentals.

So, this blog post is about…

It is about three things:

  • (1) What makes a stock blue chip?
  • (2) Finding a list of existing blue chip stocks.
  • (3) Preparing a list of potential blue chip stocks.

In the list of existing blue chip stocks, we will also check if these stocks are trading at overvalued levels or otherwise.

In the list of potential blue chip stocks, we will do two things:

  • First: We will highlight their business fundamentals.
  • Second: We will check their price valuation.

#1. What makes a stock blue chip?

Blue Chip Stocks India - Business Fundamentals

Different people may use different parameters to screen blue chip stocks.

I will tell you the parameters which I use to identify my blue chip stocks.

Let’s see what are these parameters:

  • High Enterprise Value: This is one of the measure of the size of company. Blue chip stocks are very large in size. Hence, a blue chip stock must necessarily have high enterprise value. Read more about enterprise value of stocks here.
  • High Profitability: A highly profitable company is one which can generate more profits per unit cost. One of the best measure of profitability of is ROE and RoCE. High profitability of business is one of the main reasons which makes a company blue chip. Read more about the use of ROE and RoCE for stock valuation.
  • Low Debt: Enterprise value of a company is a summation of market capitalisation and “net debt” (debt – cash) . But this does not mean that high debt companies will qualify as blue chips. No matter how high is their debt levels, it must be low compared to the companies net worth. How to measure it? Debt Equity Ratio (D/E). Read more about debt free companies.
Blue Chip Stocks - High Enterprise Value but Good Debt

#2. List of existing blue chip stocks

How to prepare this list? We will have to follow a screening process.

Which screeners we will use? The same what was described in #1 above.

I’ve applied the above screeners, and list of top blue chip stocks are as shown below:

  • EV = Enterprise Value (Rs.Cr.)
  • ROE = Return on Equity (%)
  • RoCE = Return on Capital Employed (%)
  • D/E = Debt Equity Ratio

(Updated as on 29-July’19)

SLStock NameEVROERoCED/E
1TCS7,49,42636.1846.160.00
2Infosys 3,10,71123.8037.410.00
3ITC 3,14,26323.8034.150.00

#3. List of potential blue chip stocks

These are those stocks which has still not become as large as current blue chips, but they have potential.

How we are judging their potential?

By looking at their ROE, RoCE and D/E numbers with respect to the benchmark created by “existing” blue chip stocks.

What are the benchmarks? ROE>17%, RoCE>15%, D/E<1.

[P.Note: Here I use one more filter related to Enterprise Value (EV). My potential blue chips must have an enterprise value of at least Rs.20,000 Crore. But one can play with this EV number to explore more stocks]

Let’s apply the screeners to get our list of “potential” blue chip stocks.

  • EV = Enterprise Value (Rs.Cr.)
  • ROE = Return on Equity (%)
  • RoCE = Return on Capital Employed (%)
  • D/E = Debt Equity Ratio

(Updated as on 29-July’19)

SLStock NameEVROERoCED/E
1P&G (Hygiene)34,37457.1772.940.00
2Colgate-Palmolive31,11348.3276.630.00
3HDFC AMC43,68335.0842.080.00

What makes the “Enterprise Value” of blue chip stocks so high?

Now that we have seen what are blue chip stocks and how to screen them, we are ready to know more.

What more we must know?

One of the primary screener of a blue chip stock is its enterprise value.

How their enterprise value soar so high? There are 2 reasons:

  1. They have a large market share.
  2. Their market valuation is highest.

Lets dig deeper into these reasons:

#1. What it means by large market share?

Every company operates in its core “sector”.

Like ITC is into tobacco business forming its core. L&T is more into construction business.

So when we say that blue chip companies has a large market share, it means it has a large market share within its core sector.

How to quantify “large market share”? By looking at the “sales turnover” of the company.

Let’s take an example of Automobile sector in India.

In this sector, there are 90 stocks (including auto ancillaries). All these 90+ companies, generated a sales turnover of approx. Rs.8.35 Lakh Crore in FY’19. 

The sector leaders in Auto space are as below. Please see their market share indicated as “% of Total Sales”:

Blue Chip Stocks India - Auto Sector Sales

In terms of sales, Tata Motors has 38% of the total business of the Auto Sector.

Hence it will be not be wrong to tag it as a Blue Chip Stock of Automobile Sector, right?

But we must also look at the market valuation, let’s see why…

#2. How market valuations change…

Not all stocks are valued highly by the market. There are selected few stocks, which out-weights others. 

How to identify them? By looking at their market capitalisation.

What makes them highly valued? Their business fundamentals.

Let’s see a list of top stocks of Automobile sector in terms of market capitalisation:

Blue Chip Stocks India - Auto Sector Market Cap

In terms of “Market Share”, Tata Motors is only the third largest company. Top spot is taken by Maruti Suzuki.

What made Tata Motors go down in ranking vs Maruti?

Though “Tata Motors” has a bigger market share, but few smaller companies are “valued higher” by the market. Why? 

The answer is hidden in the business fundamentals of these companies (ROE, RoCE, and D/E).

Lets compare them:

Blue Chip Stocks India - Auto Sector Market Cap and Fundamentals

What we can conclude from these numbers?

It’s a combination of high market share and strong business fundamentals that makes a stock blue chip.

Advantages of Blue Chip Stocks

The returns generated by blue chip stocks in long term are more assured.

How they are more assured? In three ways:

  1. They yield consistent dividends. 
  2. Their future price growth is more certain. 
  3. In difficult times, their stock price is more stable. 
  • Consistent dividends: These are stocks which has high market share and are also very profitable. This way they makes huge profits. Such companies often share their profits with shareholders in form of dividends. Hence blue chip companies are often the best dividend payers of the market. Read more about dividend paying stocks.
  • Predictable growth: Strong business fundamentals of blue chip stocks makes their future growth more predictability. How? High market share, high profitability, and low debt, makes them like invincible. It is hard of competitors to beat them in their game. This gives the pricing power to blue chip stocks – leading to future growth. Read more about pricing power and why Buffett loves it.
  • Price stability: of blue chip stocks in falling market is one of its biggest advantages. It does not mean that price of blue chip stocks does not fall when index is falling. Its price will also fall, but the fall will be slower and recovery will be faster. Read more about why stock price fluctuate so much.

There is no doubt that blue chip stocks are the safest investment bets for long term investors. But blue chip stocks must also be dealt with some care.

We cannot blindly invest in blue chip stocks. Here are the disadvantages of blue chip stocks…

Disadvantages of Blue Chip Stocks

Once a blue chip, always a blue chip. 

This is a wrong assumption. No company can continue to enjoy its prime position forever. 

Some known examples are: Reliance Communication, DLF, Kodak, Nokia, Lehman Brothers, etc.

These companies once enjoyed almost monopoly business in India/world.

What is the lessons we can learn from these examples? Fundamentals of blue chip stocks cannot be taken for granted.

Let’s look at few immediate disadvantages of blue chip stocks:

  • Overvaluation: Buying blue chip stocks at any price will not do. It must be bought at reasonably price levels. How to know what is a reasonable price for a blue chip stock? By estimating its intrinsic value. Read about this tool which can estimate intrinsic value.
  • Not Risk Free: People often refer blue chip stocks as “risk free”. Why? Because they represent companies which are giants of their fields. But what about those moments of time when the whole stock market is falling (like in 2008-09)? The price of blue chip stocks will remain stable? No they will also fall. Read more about what caused the 2008 financial crisis.
  • Slower Growth: In most cases this is true. As Blue chip companies are all matured, large companies, hence their future growth is not as fast. If we will compare potential returns of a good “growth stocks” verses a blue chip stock, the latter cannot win. Hence, it is essential to estimate ones investment goal accurately. If objective is faster capital appreciation in long term, growth stocks are better. 

Alternative way to identify blue chip stocks in India

This can be done by looking into their investment grade ratings.

Suppose someone told you that L&T Infotech is a great “potential” blue chip stock. Hence, you are tempted to buy it.

What you should do to check on this stock tip?

The easiest way to do it is to visit CRISIL’s website, search for your company’s name and get the rating. 

The result for L&T Infotech looks like this:

Blue Chip Stocks India - Credit Rating L&T Infotech

This is one of the safer ways to identify a blue chip stock.

Rating provided by CRISIL are indicated below:

Blue Chip Stocks India - CRISILCREDITRATING

The safest way to invest in blue chip stocks…

This can be done by investing in them through Index ETF’s or through index funds.

Why Index? Because blue chip stocks are its major constituents.

Major indices keep reviewing their constituent stocks immaculately.

Stocks which no longer deserves to be a part of the index will be replaced with a better one. 

Stocks which are losing their position in the index are the ones which are losing their blue chip status. 

When investing is done via an index, individual investor need not worry about checking business fundamentals of their holding stocks. Read more about exchange traded funds (ETF)

Final Words…

Large Cap Vs Blue Chip Stocks

There are no doubts that Blue Chip stocks are stock’s of highest quality available in the market.

What gives them this high stature is their proven past record.

Their business are so sound that it has resulted them to be the market leaders for prolonged period of time.

Moreover, they also enjoy a huge competitive advantage above their business rivals. This gives them the much needed economic moat.

If one desires to start investing in stock market, the best starting point will be “large cap stocks”. Even better will be to buy the “prime stocks” within the large cap stocks.

Which are these prime stocks? They are blue chip stocks.

But it is also important to buy blue chip stocks at undervalued price levels.

2 Comments

  1. Hello, Must say wealth of information. Really helped me to uncover lots of my doubts and questions. Please advise if you also do consulting for trading/on-line investments. Thanks

  2. Is Vakrangee is still fundamental stock for long term investment? can we still continue investing in Vakrangee?

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