Blue chip stocks are ones that satisfy various parameters, which makes them fall under this category. They are some of the finest stocks in the country, which have generated wealth to shareholders over a period of time.
1) Leaders in their segment
Generally, these companies are top-notch companies which set the pace. Classic examples are Hindustan Unilever in the FMCG space and L&T in the engineering space. It's extremely difficult for new companies to dislodge these companies from their positions. They have a tremendous market share as well.
2) Low debt companies
Companies with a low debt may fit the bill, though it is not always the case. Some companies like L&T are capital intensive and hence may have reasonable debts on their books.
|A list of bluechip stocks in India|
3) Consistent growth in revenues
All bluechip companies see a consistent growth in revenues over a 5 year time frame though there maybe temporary blips along the way. If you examine the revenues of many of the companies above, you would realise a healthy growth all around. Similar growth in profits are applicable
5) Return on equity
If a company is able to give a return on equity of around 15 per cent, we can consider it as a good stock to qualify as a blue chip stock.
If a company earns a profit of Rs 100 on an equity of Rs 1000, we could say that the ROE or Return On Equity is 10 per cent.
6) Market capitalization
The company qualifying for a blue chip stock, must have a decent market capitalization. However, it is very difficult to precisely quantify what kind of market cap. A market cap above Rs 2000 crores, would be good enough, since many blue chip stocks could also have a low equity base.
Should you invest in blue chip stocks India?
Most of the bluechip stocks tend to rally in the early stages of their growth. In India most of them form a part of the Sensex or midcap companies. Some of them would be prone to industry risks.
It's always difficult at a mature stage for a bluechip stock to achieve some of the above mentioned parameters. For example, for a share like L&T it may not have a low debt to equity and may not be able to year on year generate a ROE or 20 per cent or so. That does not stop making it a blue chip.
That is why it is very important to clarify that you could use a number of metrics for a company to qualify as a blue chip stock. Looking at just one parameter in isolation is just not good enough.