In stock markets, we often come across different types of investors. Some are traders wanting to make a quick buck overnight, while some investors prefer value stocks and some high growth stocks.
There is another category of investors who just prefer to invest specifically in blue chip stocks. Yes, many of the blue chip companies in India also fall in the category of value stocks thanks to their robust fundamentals and strong financials.
I remember one such investor from my neighborhood, an elderly gentleman named Mr. Gandhi who used to invest only in blue chip companies in India. Whenever someone asked him for stock investment advice his answer would be to invest only in blue chip companies. And if anyone asked for the rationale behind this advice he would simply say “They are blue chip companies for a reason. Do you still need a reason not to invest in them?”
Mr. Gandhi’s investment thesis proved right as most of his investments in blue chip companies in India have multiplied over the decades creating multi-generational wealth. Though Mr. Gandhi is no longer alive today, his family is reaping the benefits of his farsightedness.
But is this investment theory of investing in blue chip companies in India still relevant in today’s age?
Considering the significant run-up in stock prices of blue chip companies in India over the last few decades, can they still repeat their history of wealth creation for shareholders?
In this article let’s take a detailed look at:
What are blue chip companies?
Origin of the term ‘blue chip companies’
What are the key traits of blue chip companies?
Which are the best blue chip companies in India?
Why blue chip companies in India are considered safe bets for investment?
Are stocks of blue chip companies in India the only investments you need?
What are blue chip companies?
Blue chip companies are well-known, well-established, and financially sound companies. Such companies are generally known to offer high-quality, widely accepted products and services. Due to their strong fundamentals and sound financials, blue chip companies are known to withstand economic downturns and operate profitably consistently which helps in contributing to their track record of stable and reliable growth.
Origin of the term ‘blue chip companies’
The term \”blue chip\” in relation to stocks was first coined by a Dow Jones employee named Oliver Gingold, in 1923 when he observed that certain stocks were trading at $200 or more per share. His inspiration was attributed to the fact that in the game of Poker, blue chips used have more value than red and white chips. In today’s world, however, blue chip companies do not necessarily mean stocks trading at high prices. Rather it means stocks of high-quality companies with strong fundamental values and has withstood the test of time.
Companies like Coca-Cola, IBM, and Unilever are some of the best examples of blue-chip companies internationally that are market leaders in their respective industries and have built a strong brand reputation over the years.
What are the key traits of blue chip companies?
- Blue chip companies are well-established companies
- Products/services of blue chip companies are widely used and have a loyal customer base
- Blue chip companies have a strong brand recall value
- Blue chip companies have a consistent track record of stable growth and profitability
- Due to their high standards of products/services, they are market leaders in their segment
- They have low or negligible debt
- They have strong balance sheets
- Blue chip companies have a large market capitalization (greater than 20,000 crores in India)
- Blue chip companies offer reasonable and regular dividends to their shareholders
Which are the best blue chip companies in India?
Reliance Industries Ltd.
Headquartered in Mumbai, Reliance Industries Limited (RIL) is an Indian multinational company with business interests spread across energy (oil and natural gas), petrochemicals, textiles, retail (Reliance Retail), and telecommunications (Reliance Jio). It is one of the most profitable companies in India and the largest publicly traded company in terms of market capitalization in India.
Asian Paints is India\’s largest and Asia\’s third-largest paint manufacturing company founded in the year 1942. Along with its subsidiaries, the company has operations in 22 countries across the world and distribution in 65 countries. The company’s success story can be largely attributed to its ability to connect with its dealers and consumers easily across various economic demographics.
The company has a well-established distribution network through which it supplies its paints to approximately 50,000 retail shops directly across the country. It has also partnered with retailers to offer customized services to retail customers.
Infosys Ltd.
Headquartered in Bengaluru, Infosys Limited is the second-largest Indian IT company that provides business consulting, information technology, and outsourcing services. Established in the year 1981, with a capital of US$250, Infosys has grown to become a US$72.2 billion company in 4 decades.
One of the largest diversified players in India present in businesses such as cigarettes, FMCG, hotels, specialty papers, ITC is the market leader in the domestic cigarette and packaging & printing business. ITC also operates the second-largest hotel chain in India in terms of revenue and profitability. The company has a strong and extensive distribution network spread across the country and enjoys a strong brand recall value. Read more about investing in ITC stock.
Nestle India Ltd.
Nestle India Limited is a subsidiary of Swiss multinational company Nestle, the largest food and beverage company in the world. The company has a loyal customer base for its wide range of products such as breakfast cereals, pet food, infant foods, nutritional drinks, seasonings, soups, sauces, coffee, beverages, frozen and refrigerated foods.
Hindustan Unilever Ltd. (HUL)
HUL is India’s largest fast-moving consumer goods company. The company offers a wide range of products ranging from water purifiers, packaged foods skincare, toothpaste, deodorants, ice cream, tea, coffee, soaps, detergents, shampoos, and cosmetics
(Disclaimer- These stock names are given only for information and should not be considered as a recommendation to buy or invest)
Are stocks of blue chip companies in India the best investment bets?
Generally, blue chip companies are considered as safe investments as they have managed to withstand and grow despite several challenges and market cycles, leading to it being perceived as a safe investment. However, this may not be 100% correct at all times. For example, the collapse of companies like Enron and Lehmann Brothers considered as blue chip companies in their prime days is a testimony to the fact that no company is 100% safe. Investments in blue chip companies are less risky as compared to small and midcap companies. But not 100% risk-free.
Risk-averse investors can invest in blue chip companies as a part of their overall portfolio but the entire portfolio should never consist of only blue chip companies.
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Read more: How Long-term investing helps create life-changing wealth – TOI.