Blue Chip Companies - How does one Identify them?

Investors have always been advised to pick up stocks of blue-chip companies as part of their portfolio. But what exactly is a blue-chip stock, how do companies qualify to be one and why are they referred to as blue chips? We would like to address these questions in this article and evaluate some of the Indian companies that would qualify to be a blue-chip company.

Oliver Gingold first coined the term Blue Chip stock in the 1920s. On noticing several trades on the stock ticker fluctuating between $200 to $250 a share, he informed Lucien Hooper of the famed stock brokerage firm W.E. Hutton & Co. that once back at work, he intended to write about these "blue-chip stocks." Ever since this term has been used to refer to high priced quality stocks. Some people believe the term to have been derived from the poker game, where a blue disk begets the highest value. 

Blue Chip Companies - How does one identify them?

Blue-chip stocks share large and well-reputed companies with a high market capitalization with a long history of sound financial performance. These stocks are capable of enduring severe market conditions and provide good returns in stable market conditions. However, the shares of these companies are dearer, as they have good credibility and are often market leaders in their respective sectors. All these factors make them very popular among investors. These are the key differentiating factors from a normal company.

For a company to achieve this status, the following parameters can be used to identify blue-chip companies, although not exhaustive.

• Companies having consistent annual revenue over a period of time.
•  A stable debt-to-equity ratio with a sustainable return on equity (RoE), interest coverage ratio and superior cash flows.
•  Market capitalization and price-to-earnings ratio (PE).
• Companies that benefit from the significant competitive advantage over their peers give them the potential to outperform in their markets.
• Companies with consistent growth trajectory and clear vision of the future.
• Good Management setup and Corporate Governance.
• These companies also figure in the NIFTY or Sensex.

Blue-chip stocks are a desirable investment option for achieving long-term financial goals. The reasons for the same are highlighted below.

• Assured returns: Blue-chip stocks guarantee returns to the shareholders in the form of dividends. These companies are well-established and also serve as a safe investment avenue for most investors. This safety prompts the assurance of earning steady and guaranteed returns.
• Credit-worthiness: A financial analysis of these companies would reflect high creditworthiness making it an ideal choice for investors.
• Risk factors: The risk factor associated with blue-chip companies is comparatively less, making it a perfect choice for risk-averse and conservative investors.
• Growth prospect: These companies display steady growth in earnings and market capitalization. 
• Cushions the impact of the recession, inflation, and economic stagnation. There is a perception among investors that blue-chips can survive market challenges of many kinds; while this may be mostly true, it is not a guarantee. 

Best Blue Chip Companies

Let us review a few of the blue-chip companies in India that are a part of the NIFTY 50

Tata Consultancy Services Ltd. (TCS) - A global leader in IT services, digital and business solutions. It was established on 1 April 1968 as a division of Tata Sons Limited and is currently spearheaded under the leadership of Mr N Chandrasekaran. Its operations span 149 locations across 46 countries. TCS is the second-largest Indian company in terms of market capitalisation.

TCS Business and Technology Services help enterprises become future-ready with its offerings across the digital technologies, including Cloud, IoT, Business Operations, Infrastructure, Cybersecurity, Blockchain, Data and Analytics, Quality Engineering, and Automation.

HDFC Bank - HDFC Bank Ltd. is a leading Indian banking and financial services company. HDFC Bank is India's largest private sector lender in terms of assets. In terms of market capitalization, it is the largest bank in India as of March 2020. Founded in August 1994, the bank currently has Mr. Aditya Puri at the helm. It boasts of a nationwide distribution network of 4,715 branches and 12,260 ATM's in 2,657 cities and towns. HDFC Bank offers a wide range of banking services and treasury products catering to the needs of wholesale and retail customers

Infosys Ltd. - Infosys is a global leader in next-generation digital services and consulting. They serve clients across 46 countries to navigate their digital transformation. IT Solutions and Services, Consulting, Business Process Outsourcing, Products and Platforms, Engineering Services, Cloud Services, Artificial Intelligence, Digital, Big Data are the core services provided by them. They clocked revenue of 1,278 crores USD (2020). The Company is currently being led under the able management of Salil Parekh.

ITC Ltd. - ITC Limited is an Indian multinational conglomerate company established in 1910 as the Imperial Tobacco Company of India Limited. Mr. Sanjiv Puri currently heads it. Last year it recorded a revenue 52,035 crores INR. ITC boasts of businesses spanning FMCG, Hotels, Paperboards and Packaging, Agri-Business, and Information Technology. The Company is one of India's most valuable business corporations with a market capitalization of nearly US$ 50 billion and a gross sales value of US$ 10.8 billion.

Coal India Ltd. - Coal India Limited is a government-owned coal mining and refining company headquartered in Kolkata. It is the largest coal-producing Company in the world and a Maharatna Public sector undertaking. The Company contributes around 82% of the total coal production in India. Established in 1975, it is currently spearheaded under the guidance of Mr. Anil Kumar Jha.

CIL operates through its subsidiaries in 84 mining areas spread over eight states of India. As of 1 April 2020, it has 352 mines, of which 158 are underground, 174 opencast, and 20 mixed mines.

Hindustan Unilever Ltd. - Hindustan Unilever Limited is the subsidiary of Unilever PLC, which is a British-Dutch multinational company. Its current CEO is Mr. Sanjiv Mehta. Hindustan Unilever Limited is India's largest FMCG with a heritage of over 80 years in India. With over 35 brands ranging from soaps, detergents, shampoos, skincare, toothpaste, deodorants, cosmetics, tea, coffee, packaged foods, ice cream, and water purifiers. The Company is a part of everyone's home in India. 

HCL Technologies Ltd. - HCL Technologies Limited is an Indian multinational information technology service and consulting company headed under the august leadership of Mr. C Vijaykumar. The company offers an integrated portfolio of products, solutions, services, and IP. All these are offered and built around Digital, Automation, IoT, Cybersecurity, Cloud, Analytics, Infrastructure Management, and Engineering Services to help enterprises reimagine their businesses for the digital age. They are operating in over 46 countries, with a staff strength of 150000+ employed in R & D's worldwide network, innovation labs, and delivery centers. HCL generated consolidated revenues of USD 9.94 billion for 12 Months Ended 31 March 2020.

Final Thoughts

Blue Chip companies are sought after ones on the stock market due to all the factors that we have detailed out in this article. However, like every other investment, the stocks of these companies must also be tracked as there have been cases where these sought after companies have failed due to poor management or mismanagement. Including them as part of your core holdings within your larger diversified portfolio is advisable. However, a prudent investor would irrespective of the stocks he holds - be it small caps or blue chips will always keep a tab on the latest news, price movements, and chart patterns.