Blue-Blooded Blue-Chips

By Niti Kiran
Jul 13, 2010

If you want the best, then you need to pay for the best. This maxim applies not just to consumer markets but also to the stock markets, especially when one sets out to buy blue chip stocks. The term blue chip derives from the game of poker, where blue-coloured chips carry the highest value. In stock market, blue chips refer to stocks of large, well-established, and stable companies that offer scope for steady but significant long-term growth.

However, one needs to be cautious about paying too high a price for these stocks. Hence, one needs to hunt for stocks in this category that are available at reasonable valuations. We have made an effort to screen such stocks for you.


Screening Criteria
In our list, we have included companies that have average return on equity (RoE) and earnings per share (EPS) of more than 20 per cent over the past five years. These blue chip stocks were picked from the primary universe of BSE 500 companies.

To ensure that these companies are able to meet their interest-payment obligations, we have tested them for adequate interest-coverage, and not-too-high debt-equity ratio.

Moreover, by limiting the price-earnings to growth (PEG) ratio at 1.5, we have tried to filter out the exorbitantly priced stocks from this list.

Upon running the above-mentioned filters, we got a list of seven stocks. All these belong to different sectors and are the leading entities in their segments.

GSK Consumer Healthcare: The company leads in the malted food beverage segment with brands such as Horlicks, Boost, Maltova and Viva. It continues to leverage on the strong brand equity of Horlicks and Boost by introducing value-added variants of these brands. The parent company, GlaxoSmithKline Plc. UK, has a strong and well-established product portfolio of various brands.

The company has over the past few years put up a robust performance through sustained volume growth in its core brands and higher contributions from new product launches. It is a cash-rich company with a balance of Rs 820 crore as on December 2009.

Rising household incomes, increasing urbanisation, more hectic lifestyles, and growth in the number of working women are some of the factors that are expected to boost the demand for processed food products. The company is expected to maintain its recent pace of growth on account of a positive outlook for the food industry.

Larsen & Toubro: It is India's leading technology, engineering, construction and manufacturing company. The company also has manufacturing facilities in China, Oman and Saudi Arabia. Slowdown in the industrial and the real estate sectors in the second half of CY2009 adversely affected the revenue and profitability of the sector during the year.

To provide thrust to sluggish economic growth, the government is looking at boosting spending on infrastructure and simplifying the procedures for project approvals. L&T is likely to benefit from these government initiatives.

The company recently bagged an order for six laning of Krishnagiri-Walajahpet Highway from NHAI. It has also signed a joint venture with Howden to design, engineer, manufacture and supply axial fans and air pre-heaters to Indian thermal power plants of capacity ranging from 100 MW to 1,200 MW. These products are vital components of energy-efficient thermal power plants. The order book position of the company stood at Rs 70,300 crore at the end of FY09.

Marico: It is a leading group in the beauty and wellness space. The company occupies a leadership position with significant market shares in categories such as hair oil, post-wash hair care, anti-lice treatment, premium refined edible oil and niche fabric care. The company's branded products are present in SAARC countries, West Asia, Egypt, Malaysia and South Africa.

In January 2010, Marico entered the South East Asian region through the acquisition of the hair styling brand Code 10 in Malaysia.

The company plans to focus on rural markets in order to achieve deeper penetration for its existing products and develop a basket of products more suited for these markets.

Maruti Suzuki: The company, which is a subsidiary of Suzuki Motor Corporation of Japan, is India's leading passenger car company, accounting for over 50 per cent of the domestic car market. It offers a full range of cars -- entry level Maruti 800 and Alto; mid-range cars such as the stylish hatchback Ritz, A star, Swift, Wagon R, and Estilo; sedans such as DZire and SX4; and sports utility vehicle Grand Vitara.

Financial year 2008-09 witnessed unprecedented fluctuations in the macroeconomic environment both globally and in India. However, the Indian economy was less affected and managed to grow well above 6 per cent. In FY10, however, the auto sector left behind its blues and put up a stellar performance, with Maruti Suzuki leading from the front.

The company has identified some key areas for action in the coming years, such as global procurement of high-technology components which are not available in India. Further, it plans to enhance the reliability of its supply chain, by focusing on industrial relations issues.

Piramal Healthcare: It is a healthcare company and is currently the fourth-largest in the Indian market with a diverse product portfolio spanning several therapeutic areas. It is also one of the largest custom-manufacturing companies with a global footprint of assets across North America, Europe and Asia.

In April 2010, the company acquired Bharat Serum & Vaccines' Anesthetic products' business consisting of Propofol, Bupivacaine and Atracurium Besylate. Recently, Piramal Healthcare sold its domestic formulation business to Illinois-based pharmaceuticals major Abbott.

Sesa Goa: The company is the country's leading private sector iron ore producer and exporter, with mining and processing facilities at various locations in India. It currently has access to 240 million metric tonne (MMT) reserves of iron ore. It is part of the Vedanta group's diversified global business interests in metals and mining industry with operations in India, Australia and Zambia.

Given the slowdown in the global economy, it is not surprising that the steel industry witnessed a sharp drop in demand during the second half of 2008-09. This led to a sharp reduction in steel production and hence contraction in demand for iron ore.

However, the company has a strong cash position and is actively exploring opportunities for acquiring mines to add to its resource base - both organically and inorganically - at a time when the depressed global economic scenario offers cost-effective opportunities.

Titan Industries: It is the world's fifth-largest integrated watch manufacturer. The company was formed as a joint venture between the Tata Group and Tamil Nadu Industrial Development Corporation. Its businesses include watches, jewellery, eyewear, and precision engineering.

In Q4FY10, the company registered healthy growth in volumes in the jewellery segment, despite high gold prices, pointing to a revival in consumer sentiments.

To avoid duplication of efforts in the retail area, the company has introduced the integrated retail services function. In the coming years considerable benefits are expected to accrue from the integration of retail services activities

source:valueresearch