Blue Chip stocks are companies which always make for the best investment in the stock market. The reason for this is because these companies are very safe from a fundamental point of view.
What are blue chip stocks
Stocks of blue chip companies are well known and have a very good management team of highly qualified employees.
Blue Chips are also safe because they have a very strong product and dominance in the market. Such companies are not affected by temporary adverse market conditions.
Blue Chip stocks are High Dividend yield companies
Blue Chip companies are preferred because they offer a high dividend yield.
Several companies which are well known for their blue chip status offer dividend yield which is as high as 5%.
Investing in blue chips stocks has the dual advantage of giving the investor the benefit of high dividend yield and also capital appreciation.
Blue Chip stocks are large-cap companies
Generally, blue chip stocks are companies with a large market capitalisation of upto Rs. 100,000 crore.
Such companies are very large in size and have their operations in several parts of the Country and also across the World.
Blue Chip stocks are dominant in the market place. They have a monopoly over their products and decide the price of the product and the terms of supply.
Blue Chip stocks to buy in 2016 and 2017
The best blue chip stocks to buy are those which are listed in the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
Blue chip stocks are very easy to buy because they have a large volume of shares that are traded every day. An investor can buy and sell several lakhs of blue chip shares in a second because the liquidity for the stocks is very high.
Most investors in blue chip stocks are large institutional investors like Mutual funds, pension funds, Foreign Institutional Investors (FIIs) etc.
Blue Chip Companies List In NSE and BSE
A list of blue chip stocks in the NSE and BSE as of 2016 and 2017 is available.
The list shows the names of the all the blue chip stocks in India that investors can invest in and feel secure about the safety of their investment:
HDFC: Consistent Growth with Best in Class Asset Quality
Consistently maintaining industry leading growth in loan book:
HDFC has seen a CAGR of 21% in the individual housing loan segment in the last five years which is well above the industry average growth rate. The recent government initiatives like “Housing for All” and incentives for affordable housing sector augur well for housing finance companies and HDFC is likely to benefit from these initiatives. HDFC is likely to witness a loan book growth of over 16-17% on higher base in the next 2 years.
Stable margins across cycles:
HDFC was able to maintain stable net interest margins of around 4% in the last few years. This was on the back drop of cyclical real-estate market and interest rate cycles. HDFC is well positioned in a downward rate cycle as it can mobilize from multiple sources at lower interest rates and pass on the benefit to borrowers while maintaining the margins.
Robust risk management leading to best in class asset quality:
HDFC has provided more than the regulatory requirement for non-performing assets making it one of the few companies with best-in-class asset quality and virtually zero net non performing assets. As on March 31, 2016 its gross NPAs stood at 0.7%, while gross NPAs were at Rs. 1833 Cr and it had provided for Rs. 2695 Cr, higher than the regulatory requirement, indicates robust risk management practice.
Potential for value-unlocking in subsidiaries:
HDFC has the potential to unlock value in key subsidiaries in insurance. Any listing of the profit making insurance business is likely to unlock value.
Valuation and Outlook
HDFC is likely to maintain steady growth of over 16-17% in retail individual home loan book, while borrowing at competitive rates from multiple borrowing avenues which helps it in maintaining its net interest margins at around 4%, whereas its robust risk management practices result in best in class asset quality while delivering superior returns. We recommend a “BUY” and value HDFC at Rs. 1500 per share (standalone business at 3.4x FY18E ABV and Rs. 550 for subsidiaries).
HDFC Bank: Consistency in Growth, Stable NIMs and Lowest NPAs
Loan book is expected to grow at a CAGR of 22% in the next two years:
HDFC Bank is expected to outpace the credit growth in the system by 3-4 percentage points and to grow at a CAGR of over 22% in the next few years. Its loan book growth is driven by a healthy mix of retail and corporate loans. Strong traction in non-fund revenues to contribute for higher net revenues.
NIM is expected to be around 4.5%:
HDFC Bank is expected to maintain its NIM around 4.5%, led by the bank’s strong CASA franchise of around 44% along with higher proportion of retail loans. Further, current deposits are likely to grow strongly due to recovery in capital markets, where the bank has higher market share.
Lowest NPAs reflect superior risk management:
HDFC Bank is relatively immune from asset quality strain in the banking industry primarily due to superior risk management practices along with lower exposure to stressed sectors. GNPA and NNPA were at 0.9% and 0.3%. HDFC Bank, with a total coverage ratio of 140% and restructured loans at 0.1% of the gross advances indicating best in class asset quality. We expect further moderation in fresh slippages.
Adequately capitalized to support balance sheet growth:
As per BASEL III guidelines, HDFC Bank has a capital adequacy ratio of 15.5% with a tier I capital of 13.2%, which will aid loan book growth plans over the next couple of years.
Valuation and Outlook
HDFC Bank was able to command premium valuation in the market for its consistent growth of over 20% in net profits, healthy balance sheet growth, higher NIMs, lower NPAs, adequate CAR, superior return ratios coupled with good corporate governance. At CMP, HDFCBank trades at 3.1xFY18E BVPS. We value the stock at 3.8x FY18E BVPS and recommend a “BUY” for a price target of Rs. 1450.
ITC: Strong Brands with Pricing Power
Pricing power emanated from leadership position in cigarettes:
ITC is a dominant player in the Cigarettes segment with a revenue market share of over 75%. It is expected to maintain double digit growth in revenue and EBIT, driven by its strong pricing power and distribution reach through which ITC’s products are sold in over 2 Mn outlets, tight control over the entire value chain and consumers’ loyalty towards the company’s brands at various price points. Higher disposable income in rural areas could result in consumers switching from lower end products like beedis and local made cigarettes to 64mm micro filter cigarettes.
Stringent anti-tobacco measures to hurt lesser known brands and benefit strong brands:
Stringent anti-tobacco measures like ban on sales of loose cigarettes, regulations to cover 80% of the pack with health warnings, banning advertisements at Point of Sale (PoS) to benefit market leaders and hurt the non-legal cigarette manufacturers more severely. Organized players like ITC can tide over with its well established brands and innovative packing & distribution strategy.
Strong traction in FMCG business to drive growth and softening commodities to expand margins:
ITC is likely to register a double digit revenue growth on the back of new product launches and higher spending on advertisement & promotion on the back of its wide distribution network. Softening of commodity prices would provide scope for margin expansion in FMCG business.
Steady performance in other non-FMCG segments:
Other segments like agri-business, paperboards and Hotels are likely to improve their performance driven by strong recovery in the Indian economy.
Valuation and Outlook
ITC is expected to register double digit growth in the next 2 years, by strengthening its leadership position in cigarettes segment, higher growth in FMCG business and steady performance in non-FMCG segments. At CMP, the stock trades at 22.9x FY18E EPS. We value the stock at 27x FY18E EPS which is lower than the last 7 year average PE of 29x. We recommend “BUY” with a target price of Rs. 425.
L&T: Proxy to Ride the Indian Economic Growth
Robust order book build-up reflects proven leadership:
L&T’s outstanding order book at the end of March’2016 stood at Rs. 2.5 Lakh Crore from diversified sectors. Robust order book build up reflects its proven leadership in the infrastructure & engineering segments and gives revenue visibility with order book coverage of over 2.5x.
Best-in-class execution capabilities-making it the most preferred partner:
L&T has an excellent track record of executing the most complex projects in diverse sectors like infrastructure, Oil & Gas, Defence, Power and others making it the most preferred partner resulting in repeat orders from clients.
Strong traction in infrastructure segment to drive growth:
L&T Infrastructure segment constitutes for 75% of the order book and 62% of its new order inflow during FY16, and is expected to drive growth with strong traction in order inflows and revenue growth along with sustained EBITDA margins around 12%.
Value unlocking by listing of subsidiaries or induction of strategic partner in business segments:
L&T is planning to list L&T Infotech in the next few months which has nearly $1.3 Bn in revenue and an EBITDA margin of over 20%, which could unlock value in the medium term.
Valuation and Outlook
L&T is well positioned to capture growth in various segments of the Indian economy with its excellent execution capabilities in diverse sectors like Infra, Oil & Gas, Defence, Metals & Mining, Railways and various others. L&T’s superior execution capabilities coupled with its balance sheet strength when compared to the highly stressed balance sheets of its many smaller competitors in the sector, resulted in strong order book build-up for L&T. We value the company at 26x FY18E EPS and recommend a “BUY” with a target price of Rs.1900.
NTPC: Consistent Capacity Additions and Higher Operational Efficiency to Drive Growth
Strong leadership position with diversified presence:
NTPC constitutes for 16% of the total installed capacity while it generates 25% of the total electricity in the country, indicating strong leadership position, while its plants are spread across the country giving the diversification benefits. With its capacity expansion plans, NTPC continues to maintain its leadership position in the coming years.
Superior PLF and coal linkages provide for a robust business model:
NTPC operates the plants at a PLF (Plant Load Factor) and PAF (Plant Availability Factor) of over 80% indicating higher operational efficiency. This coupled with sufficient coal linkages provides for a robust business model.
Planned capacity expansion gives visibility for long term growth:
NTPC’s ongoing capacity expansion is on track, at a time when several private sector power generating companies are facing host problems in expansion. It gives visibility to take NTPC total capacity to 128000MW by 2032 and maintain the leadership position.
Improvement in financial conditions of discoms to boost demand in the overall system:
The recent government’s measures (UDAY scheme) to improve the financial health of state electricity boards would boost demand for power in the system as they could buy more power by reducing the load shedding programs and implementing the schemes like power for all.
Valuation and Outlook
NTPC with its consistent growth in capacity additions, fuel linkages and higher operational efficiency is well positioned amid improving health of SEBs and uptick in the economic growth. We expect the stock to come out of under performance due to the broad based negative sentiments in the entire power sector. At CMP, the stock trades at 11.5x FY18E EPS and we value NTPC at 13x FY18E EPS and recommend a “BUY” for a target of Rs. 175.
RIL: Capex in Core Business & Telecom Launch to Drive Growth
Capex in core business (Refining & Pet-chem) to drive growth & profitability:
RIL is investing in pet-coke gasification plant that is expected to come on stream in 2016 which is expected to reduce annual energy (LNG) cost of nearly $ 1.5 Bn and is likely to increase the GRMs by approximately $1/barrel. The capex for Ethane transportation project and Refinery off-gas cracker will increase the production capacity by polymers with much lower cost of production and likely to commence in FY17. RIL’s core strength in operations is reflected in capacity utilization of over 100% at its high complexity refinery at Jamnagar delivering superior GRMs as against the Singapore GRMs.
Upstream, Petro products retailing and Shale gas to drive growth:
RIL’s upstream gas production is expected to increase from the current levels. Ramp-up in US shale gas production in its JVs is likely to contribute to growth. RIL is planning to re-commission the entire petroleum retail outlet network as the government has decontrolled petrol and diesel prices, which could contribute towards growth.
Commercial launch of RelJio 4G services could be a game changer in the Indian digital services market:
RIL is expected to launch its pan-India digital services commercially (4G broadband, voice, data content, cloud services, entertainment, MSO) under Reliance Jio network in the next couple of months which could garner significant market share given the expectations over its higher speed, wide coverage and competitive pricing. The recent soft launch of its services to its employees could fast track the commercial launch as well.
Aggressive expansion in retail to strengthen leadership position:
Reliance retail is expanding its retail network (grocery, fashion, digital, Jewellery etc.) to strengthen its leadership position in all formats. It has over 3245 stores in 200 towns and over 15 Mn consumers enrolled for its loyalty program. It is among the fastest growing retail chains in India.
Valuation and Outlook
RIL is expected to maintain profitability in its core business with a capex that increases the operational efficiency across the refining & petrochemicals business, while the new businesses like the Reliance Jio are likely to trigger the next level of growth and boost revenues. At CMP, RIL is trading at 11x FY18E EPS, We recommend a “BUY” for a price target of Rs. 1280, valuing at 13x FY18E EPS.
SBI: Biggest Balance Sheet at Bargain Valuations
Strong double-digit growth in Loan Book amid uptick in domestic economic cycle:
SBI is expected to maintain double digit growth rate in loan book amid an uptick in domestic economy. Loan book is expected to be driven by home loans, auto loans, other retail loans, agri loans, trade and services as well as higher spending in infrastructure sector. We expect SBI to register a CAGR growth of over 13% in loan book in the next 2 years.
Stable NIMs in a rate down cycle regime:
SBI was able to maintain a net interest margin of over 3% in the last 4 years; and in a downward rate cycle, NIMs are expected to sustain above 3%. Strong growth in retail deposits coupled with over 40% CASA provides a case for uptick in NIM.
Expected recovery in asset quality:
Asset quality is expected to improve in the next few quarters due to the uptick in economic recovery, government’s efforts to revive stalled projects and SBI’s efforts to regulate credit towards the stresses sectors even at the cost of slower credit growth, which is expected to yield results. As on March 31, 2016, GNPA & NNPA were at 6.5% &3.81%.
Vast network and multiple delivery channels aid for strong growth in deposits:
SBI along with its associates, having a vast network of branches across the country, is well positioned to maintain double digit growth in retail deposits and while maintaining higher share of CASA above 40% provides cushion for quality growth. Its multiple delivery channels and technology platforms are likely to provide reach for larger customer base. Government’s announcement to infuse capital to SBI is a positive development which further supports growth.
Valuation and Outlook
SBI with its focus on quality loan book growth, CASA share in deposits, sustained NIMs of over 3% along with emphasis on reducing NPAs and fresh slippages augur well in the long term. SBI presents a case for biggest and well diversified balance sheet that mirrors the domestic economy available at a bargain valuations from a long term investment perspective. We value the standalone business at 1.5x FY18E ABV and investment at Rs. 51 recommend a “BUY” rating for a target price of Rs. 260.
TCS: Consistent Growth with Superior Margins
Best-in-class growth rate in revenue:
TCS has maintained steady growth in revenue in the last 5 years even on a large base. Going forward, TCS is expected to maintain broad-based growth at a CAGR of over 15% in revenue in the next two years.
Steady improvement in margins:
TCS has improved its margins steadily between 25%-30% over the last many years, even during challenging global economic environment. This was due to continuous improvement in operational efficiency, higher employee utilization levels and increased share of high margin projects.
Well diversified revenue model:
TCS has maintained the broad-based revenue growth in various geographies and verticals, with growth contributors being BFSI (40.6%), retail (14.1%), manufacturing (10%), Telecom (8.4%) and life sciences & healthcare (7%). TCS has maintained a balance between bread-and-butter businesses such as application development & maintenance and newer growth avenues such as Digital.
Proven capabilities in managing currency volatility:
USD contributes 56.5% to its revenue pie, whereas GBP, EUR and other currencies contribute 14.5%, 7.5% and 21.4% respectively. TCS was able to manage the currency volatility even during turbulent times in the global currency markets.
Digital to drive growth:
Digital initiatives including digital marketing and mobility services contributes for 14-15% of the total revenues and with a 52% Y/Y growth it is among the fastest growing segment. Going forward, Digital business is expected to maintain higher growth rates in the next few years.
Valuation and Outlook
TCS with its broad based service delivery model is expected to register consistent growth of over 15% in revenue with superior margins of around 26-28% over the next few years. TCS continues to command premium valuations due to its consistent growth and profitability. We recommend a “BUY” with a target of Rs. 3100, valuing the stock at 20x FY18E EPS.
Tata Motors: New Launches at JLR and Up-cycle in Domestic CVs to Drive Growth
New Launches at JLR to Drive growth:
JLR’s all new launches – New Evoque, RR Sports, Discovery Sports & new XF including latest Jaguar XE – are well received in all major markets, it further plans number of new launches new XE, F-PACE, convertible Evoque in all markets over next one year. Company launched F-Pace in Apr’16 and response for F-Pace is very strong.
Strategy in place to regain the momentum:
We believe that lower volume from Chinese market and price rationalization would get completely nullified by new products at higher ASP and favourable cross currency movement. We believe that company’s strategy on new products and its huge investment on R&D started paying off. Its healthy growth despite China slowdown is commendable and it justifies company’s high capex plan. Moreover, China JV has witnessed strong sequential improvement in profitability, ahead of targeted time frame.
Recovery in Domestic M&HCVs:
Tata Motors is expected to benefit from the recovery in the domestic CV sales which are linked to the economic recovery. With the expectations of a sustained economic growth over 7.5% and new regulations stipulating scrapping commercial vehicles over 10 years to generate replacement demand for CVs in India. We expect improvement in standalone operations, backed by CV up-cycle.
New launches in domestic PV segment:
Tata Motors has launched new models in the domestic passenger vehicle segment which have received good initial response.
Valuation and Outlook
Tata Motors is expected to deliver strong growth driven by new launches at JLR and recovery in the domestic business. We value standalone business at Rs. 106, JLR at Rs. 519 and other subsidiaries at Rs. 52 based on FY18E EBITDA, net debt of Rs. 127 per share and recommend a ’BUY’ on Tata Motors with an SoTP based target of Rs. 550.
UPL Ltd Good Monsoons and Rebound in Agri Commodities Prices to Drive Volumes
Rebound in global agri commodities prices to boost sales in key international markets:
Global agri commodities prices have bounced back sharply, with Corn gaining 15%, Soybeans jumping 27% and Sugar surging 14% on a YTD basis in CY2016. The surge in agri commodity prices is likely to boost sales volumes of crop protection chemicals in the major markets like Brazil, USA and other major markets that contribute for significant portion of revenues for UPL.
Expectations over normal monsoons in India to drive sales growth:
Indian market which contributes for around 20% of UPL’s revenues could see a rebound in sales volumes based on predictions of normal monsoons that are critical for Rice and Cotton crops. The recent hike in MSP for grains and additional bonus for pulses could encourage farmers to target for higher yields which boost the demand for crop protection chemicals.
Well diversified product basket with large scale manufacturing in India offers economies of scale and cushion margins:
UPL has a well diversified product basket in the generic agri chemicals with over 1344 formulations which was achieved through a string of acquisitions (18 in the last 12 years) and also product portfolios. This was supported by large scale flexible manufacturing facilities in India provides for economies of scale at competitive costs providing cushion for higher margins.
Product registrations backed by wide distribution network spread across the major markets in the world:
UPL has over 4692 registrations through its 82 subsidiaries globally. This gives the ability to launch the products in key agri chemical markets across the world helps UPL in calibrating the marketing and distribution strategy based on the weather and crop patterns.
Valuation and Outlook
UPL is expected to benefit from the surge in demand for crop protection chemicals amid surge in global agri commodity prices and expectations of good monsoons in India. UPL with its well diversified product basket and wide distribution network in major markets is well positioned to seize the opportunity. We recommend a “BUY” with a target of Rs. 750, valuing the stock at 16.7x FY18E EPS.
Big Investors Buy Blue Chip Stocks for Portfolio
many big investors like Rakesh Jhunjhunwala, Radhakishan Damani and Ramesh Damani buy blue chip stocks for their portfolio. However, some other investors like Porinju Veliyath, Dolly Khanna and Vijay Kedia do not prefer large-cap blue chip stocks for their portfolios. Instead, they prefer small cap and mid-cap blue chip stocks for their portfolio
List of small-cap and mid-cap blue chip stocks to buy
A list of small-cap and blue-chip blue-chip stocks is available. These stocks are ripe for a buy and have the potential to become multibagger stocks in the near future.