[List of blue chip stocks in India] When I started investing in the stock market, experts used to talk about blue chip stocks. These stocks seemed to be a default pick for almost all investors. The stock market is a wide topic, hence the views of even experts vary about it. But they all seem to agree on the reliability of blue chip companies.
As a beginner, I was advised to invest in blue chip companies with low PE ratios. My investment journey started with low PE blue chip stocks in India. I’ll admit that, though they may not be fast compounders but are extremely reliable. It is also true that buying blue chip stocks when the market has bottomed can fetch higher returns. Few examples of the market bottoming out are Year-2008-09 and Year-2020.
Top Blue Chip Stocks in India
7 Facts About Blue Chip Companies
- What are blue chip companies?
- Warning about blue-chip stocks.
- What is the present market situation?
- They are expensive stocks.
- Pros & Cons of Blue chip companies.
- How To Invest In Blue Chip Stocks?
- My Blue Chip Screener’s Algorithm
- Frequently Asked Questions (FAQs)
What are blue-chip companies?
Blue-chip companies are established and mature companies. As they also enjoy a moat, they are also more profitable than their peers. These companies are mostly the leader in their industry. A recognizable brand name further gives these companies an edge over their competitors.
Why are they called blue chips? Probably the term “blue-chip” is taken from the game of poker, a card game. In this game, colored chips are used. Blue chips are the most pricy of all the colors. Taking this analogy forward, companies of the stock market that carry a high value are tagged as blue chips.
Another characteristic of a blue-chip business is that they are very well-capitalized. What does it mean? It means that a lot of money is invested in it. This invested money can be both retained earnings and share capital (investors’ money). The investors can be HNIs, FIIs, DIIs, and common shareholders.
As these companies are well established and mature, their size is large. Their large size is a factor of revenue and market cap both. Hence, almost all blue-chip companies eventually falls into the large-cap space. Combining the two characteristics, large size, and well-capitalized makes such companies safer for investing.
The easiest way to identify blue-chip companies is to look into the constituents of Sensex or Nifty-50. We can also refer to a list of the highest market capitalization stocks and treat them as blue chips. But it is a crude way to identify blue chips.
In our Stock Engine, there is a pre-built stock screener for blue chip stocks. This screener’s algorithm is written in a way that brings forward larger, safer, and fundamentally strong companies.
Warning About Blue Chip Stocks
There are two major limitations of investing in blue chip stocks.
- Growth: Their future growth prospects may not be as fast as other smaller businesses. Why? Because these companies have already become so big, within their own sectors that their future growth possibility becomes comparatively smaller.
- Valuation: Blue chip stocks attract attention. Hence, they often trade in the overbought space. It is very difficult to find a blue chip stock trading at undervalued price levels or even at low PE levels.
If one wants to invest in a blue-chip stock, attention must be given to future growth prospects and price valuation.
- I personally do not worry about growth factors a lot. Blue-chip companies enjoy a competitive moat. So a comparatively slower but reasonable future growth is something which they can deliver. But their price valuation is a concern.
- No matter how good the company is, buying its stocks at overvalued price levels will not help. In dealing with blue-chip stocks, emphasis must be on the price at which it is bought. How to do it? We can try to estimate its intrinsic value.
How is the Present Market Situation?
What is the present situation? As of today (4th Mar 22), Sensex has corrected by about 4,800 points (8% down) this year. Nifty-50 is at 16,200 levels. In my earlier blog of Oct’21, we discussed Nifty cooling down to 16,000 levels. Such a correction looked unlikely back then. But it looks possible now.
When a bellwether index like Sensex and Nifty corrects by 7-8%, it takes even big stocks down. Let me give you a snapshot of the present scenario. This is a list of the top 20 stocks by market cap. Check their last one and two-month price corrections.
Though the main indices have fallen by 7-8% odd percentage points, few top stocks have corrected by 15% or more. So, in the present situation, the market is falling. But stocks of a few blue chip companies have corrected much more.
So, shall we go ahead and start buying these stocks? This decision can be taken only after value analysis. Please read further.
They are Expensive Stocks
Blue-chip stocks are the most expensive stocks in the market. How can we say that? By looking at their PE multiples. Allow me to present to you a list of the Top 20 stocks with their PE, after price correction in the last months:
Except for Banks, NBFCs, and energy companies, PE of other stocks are high. Read: About low P/E stocks.
This is the risk of investing in a blue-chip company. If we buy such stocks casually, there are high chances that we are buying them at overvalued levels. Though the business fundamentals of these companies are strong, the expensive purchase will only yield below-par returns.
Pros and Cons of Blue Chip Stocks
One thing is for sure, most of the time, blue-chip stocks trade at a high P/E multiple. So, if these stocks are so expensive, is it worth buying them? Yes and No.
- Yes: because they represent high-quality companies. The target of any stock investor is to buy stocks of quality companies. They happen to be those easy-to-find quality companies. But as all are aware of their quality attribute, everyone wants to buy them. They are always in demand, hence they trade at high P/E multiples.
- No: Because they may yield below-average returns if bought at high PE levels.
Am I confusing you about blue-chip stocks? Sorry, it was necessary to highlight the negative aspect of it. Let’s dig deeper into the advantages and disadvantages of these stocks:
The returns generated by blue-chip stocks in the long term are more assured. How? In three ways: (a) they can yield consistent dividends, (b) their earning growth is more certain, and (c) their stock price is more stable.
- Consistent dividends: These are stocks that have a high market share and are also reasonably profitable. In other words, they enjoy an economic moat. Their earning power allows them to distribute dividends. They are often the best dividend payers in the market.
- Predictable growth: Strong business fundamentals of these stocks make their future growth almost certain. How? Large size, high market share, and moat make them invincible. How does it help? They have pricing power – leading to future growth. Read more about pricing power and why Buffett loves it.
- Price stability: prices of these stocks are stable. It does not mean that their price does not fall when the index is falling. Their price will also fall, but it will be slower and recovery will be faster. Read more about why stock prices 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 care.
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 their industry. What are the lessons we can learn from these examples? The fundamentals of blue-chip stocks cannot be taken for granted. Let’s look at its few immediate disadvantages:
- They are Not Risk-Free: People often refer to blue-chip stocks as risk-free. Why? Because they represent companies that are fundamentally strong. But what about those moments of time when the whole stock market is falling (like in 2008-09)? The price of even the best stocks will fall.
- Slower Growth: In most cases it is true. As blue-chip companies are all matured, large companies, hence their future growth is not as fast. If we will compare the potential returns of growth stocks versus blue chips, the latter cannot win. If the objective is faster capital appreciation in long term, blue chips will not deliver.
How To Invest In Blue Chip Stocks? Planning
Till now what we have seen are a few good and bad points about blue-chip stocks. At this stage, we are prepared to deal with it. So in this portion, we will see three ways one can plan to invest in blue-chip stocks.
- Screener: We’ve built a blue-chip stock screener. This tool is designed to highlight the leaders of each sector or industry. Read more about the screener’s algorithm here. To find individual quality blue chip stocks, one can refer to this screener.
- Index Funds: People can use mutual funds to invest in a basket of blue chip stocks. If I’ll go the index route for investing in blue chips, I’ll focus on these three indices, Nifty-50, Nifty Next 50, or Sensex. Read more about timing the market and index investing here.
- Index ETFs: Index ETFs and index funds are two similar financial instruments. ETFs is a hybrid product of mutual funds and stocks. There are few ETFs listed on NSE. ETF’s underlying index is Nifty 50, Nifty Next 50, and Nifty50 Value 20 are suitable for indirect investing in blue chip stocks. Read more about ETFs here.
Our Blue Chip Screener’s Algorithm
In the world of stock investing, we often use the term blue chip stocks. In this article, you’ve already read its definition. Honestly speaking, it is not easy to define a general term like it. But, more difficult was to write its financial algorithm.
I’ll share with you the logic based on which our blue chip algorithm works:
On the internet, there are several definitions of blue-chip stocks. Frankly speaking, when I read all of them, it confuses me more. Hence, my stock screener follows the below five parameters to identify blue chips.
GMR Score Algorithm
- Sector Leaders: Companies that are leaders in their industry can be tagged as blue chips. Our blue chip screener looks at the company’s revenue figure to establish leadership. Suppose there are five companies in an industry, the ones with the higher revenue will get priority.
- Profitable Business: A market leader which is also profitable gives us an ideal blue-chip contender. Our blue chip screener algorithm considers the ROE, ROCE, of the company to quantify the profitability level of a company.
- Dividend Payout: Considering that blue chip companies are established companies, they are good profit generators. But as they’ve already matured, their scope for future growth is small. Hence, they share most of their net profits (PAT) with the shareholders. The dividend payout ratio of blue chip companies is higher than other companies.
- Growth: These companies have high pricing power. Hence, even though they are mature companies, they post only average growth numbers. Our stock engines’ algorithm considers a combination of revenue, book value, and EPS growth to score a company for its growth rate.
- Risk and Liquidity: These companies have the characteristic of being low-risk for their investors. A part of that low risk comes from the high liquidity they enjoy. Our screener’s algorithm considers a company’s debt to equity-ratio, interest coverage ratio, and current ratio to check the company’s liquidity position and risk factor.
Based on the above-mentioned parameters, our pre-built screener churns out credible blue chip companies.
There is no doubt that Blue Chip stocks are stocks of the highest quality available in the market. What gives them this high stature is their proven past record.
Their business is so sound that they’ve become the leaders of their industry. Moreover, they also enjoy a competitive advantage over their business rivals.
If one desires to start investing in the stock market, the best starting point will be large-cap stocks. Even better will be to buy prime stocks within the large-cap space.
Which are these prime stocks? They are blue-chip stocks. But as explained in this article, there are a few limitations with these stocks. Care must be taken before investing in these stocks.
An informed investment in blue-chip companies can result in above-average returns in the long term.
FAQs (Frequently Asked Questions)
There are three ways to invest in blue chip companies. The first is to invest in them individually. But the problem here is how to identify a blue chip. But this problem can be resolved by referring to our blue chip pre-built screener. The other way is to invest in them indirectly through index funds and ETFs as explained above.
In terms of revenue size and market cap, it is definitely a market leader. But as per our algorithm, it fails on many fronts like debt load, liquidity, profitability, dividend payout, etc. Hence, in our pre-built screener, it gets a score very low GMR score.
After applying the above-mentioned filters, out of all listed companies, only about 150 passed all our filters. But out of these companies, only a handful could fetch a high GMR score.
Traditionally, the top companies in the FMCG, Finance, IT, Auto, etc sectors score higher ratings.
In our blue chip screener’s algorithm, ITC scores a very high rating. So yes, we can definitely call it a blue chip company.
In terms of revenue size and market cap, it is definitely a market leader. But as per our algorithm, earns a low score on almost all parameters as explained above.
BPCL also crosses our blue chip’s filters algorithm but earns only a low GMR score.
Thanks for reading it through to the end.
Have Happy Investing.