Total Rating and Shares Pledge: Why Inventory Engine Is Good

Introduction

A couple of weeks again, I used to be poking round within the portfolio of Quant Small Cap Fund. One inventory that caught my eye was Indian Hume Pipe.

It’s been a gentle holding for them over the past two years, with a constant 7.6918 lakh shares of their portfolio since final 2 years (July 2023 to July 2025).

The worth of this holding has swung between Rs.10.22 crore and Rs.41.32 crore, reflecting the inventory’s worth actions.

What actually grabbed my consideration, although, was its dirt-cheap P/E ratio of simply 3.71. That’s the type of quantity makes you sit up and take discover, proper?.

Naturally, I puzzled why my Inventory Engine wasn’t screaming about this inventory.

On this submit I’ll share, how my up to date Total Rating Algorithm, with its intelligent dealing with of pledged shares, quietly does an excellent job.

Why Low P/E Shares Get My Consideration

Every time I spot a inventory with a low P/E, I get curious.

A P/E of three.71, like Indian Hume Pipe’s, suggests the inventory may be undervalued.

It’s like discovering a very good deal on sale on the native market. You wish to know if it’s price grabbing.

My first intuition is to examine if any mutual funds are holding it. That’s how I landed on Quant Small Cap Fund’s constant stake in Indian Hume Pipe.

If a fund like Quant is holding regular, it’s an indication the inventory has one thing going for it.

However right here’s the twist: my Inventory Engine wasn’t flashing this inventory as a prime decide. Why not?

The Hidden Threat of Pledged Shares

Digging deeper, I discovered the reply.

Indian Hume Pipe’s promoters have pledged about 24–25% of their shares.

For these new to this, pledged shares are when promoters use their shares as collateral for loans. It’s like taking a mortgage in opposition to your gold jewelry.

If the mortgage goes unhealthy, the lender can promote these shares, and the inventory worth can crash. We’ve seen this with corporations like Zee Leisure prior to now.

It’s a threat, and my Inventory Engine is aware of it.

That’s the place the Total Rating Algorithm is available in, quietly doing its job to maintain me from chasing dangerous bets.

The Outdated Algorithm: Too Harsh, Too Easy

I carried out this up to date round 1.5 years again.

My buddy and former colleague Prashant advised me that I ought to present the shares pledged proportion on my Inventory Engine app. He wished to make use of this metric to additionally display screen out excessive pledged shares utilizing the Large Screener of the Inventory Engine.

So, not solely I included this metric within the app however I used it to penalize shares if their shares pledged proportion was excessive.

How I did it, by penalizing it by rendering decrease Total Scores to them.

Earlier, the Inventory Engine used a linear penalty for pledged shares. For instance, If X% of shares had been pledged, the Total Rating took a straight Y% hit.

This algo was straightforward to grasp and implement, nevertheless it wasn’t excellent. Why? As a result of it handled a 20% pledge very in another way from 20.5% pledge. That’s like scolding a child for scoring 90% and never 91%.

It didn’t really feel proper. So I made a decision to replace the Total Rating algorithm with a extra uniform and linear rating adjustment for shares pledge issue.

New Algorithm For Shares Pledge Metric

This was the up to date Total Rating Algorithm: 

if pledge_percent > X%:
    overall_score = 0
else:
    overall_score = overall_score * (1 - (pledge_percent / Y) ** n)
[variables: X = Pledge percent, Y = Constant, n = Penalty Curve Factor]

Don’t fear concerning the math. I’ll clarify it to you.

This system is sort of a clever uncle who is aware of when to be strict and when to let issues slide. Right here’s the way it works:

• If greater than X% of shares are pledged, the Total Rating mechanically drops to zero. It’s a transparent sign: too dangerous, keep away from such shares.
• For pledges beneath X%, the rating is lowered utilizing a quadratic penalty: 1 – (Pledge% / Y )^n. This methodology of dealing with numbers ensures that the penalty begins small however grows sooner as pledging will increase.

For a inventory like Indian Hume Pipe, whose pledge proportion is about 25% pledge, the penalty is (25/Y)^n = A%.

If the inventory’s uncooked Total Rating is 65, the adjusted rating is 65 * (1 – A%) = 50 (say).

Such a dealing with of the quantity (pledge proportion), handles decrease pledges gently however is hard on greater ones.

Why the Penalty Curve Makes Sense [factor “n”]

Why use a penalty curve issue?

Threat doesn’t develop in a straight line. A 5% pledge isn’t 5 instances riskier than a 1% pledge.

The hazard escalates as pledging will increase. The system’s penalty curve captures this appropriately.

It’s like driving on a highway that will get rougher the additional you go, the driving force will ease off a bit at first, however slam the brakes if it will get too bumpy.

This ensures shares like Indian Hume Pipe aren’t overly penalized however nonetheless mirror their true threat.

How It Stacks Up: Outdated vs. New

Let’s put numbers to it. Say a inventory has an Total Rating of 100.

Right here’s how the previous and new algorithms examine:

Observe: Simply an instance, precise algo will render completely different outcomes.

This reveals the brand new system is extra nuanced, thoughtful, and strict on the identical time.

It is sort of a clever instructor dealing with delicate college students in another way than mischevious youngsters. My algorithm won’t overreact to small pledges however flags large dangers.

For a inventory like Indian Hume Pipe, the 25% pledge lowers its rating simply sufficient to maintain it off my prime picks, even with that tempting P/E.

Conclusion

Inventory Engine’s algorithm is balanced.

It doesn’t simply chase low P/E shares like Indian Hume Pipe blindly. It seems on the greater image, factoring in dangers like pledged shares.

That’s why I belief my Inventory Engine.

What’s the lesson right here to be used as inventory buyers?

This expertise with Indian Hume Pipe can educate us one thing. Low P/E shares can appear like bargains, however there’s typically a catch. Pledged shares are a kind of hidden traps. In all probability, that is the primary cause why large buyers aren’t touching this inventory and therefore, its P/E is so low.

Inventory Engine’s algorithm spot these intircate particulars. It’s coded in a means that it doesn’t overreach, and helps us see good alternatives.

It’s not excellent, no software is, nevertheless it’s a step nearer to creating sense of the market’s chaos. As an Indian investor, I worth that type of readability. Don’t you?

That’s the reason I say, my Inventory Engine is a quiet hero.

It could possibly weigh a inventory’s strengths and dangers, and offers us a clearer image.

It won’t provide you with flashy numbers, as a result of I’ve coded its been coded for practicality.

So, subsequent time you’re eyeing a really low P/E inventory, , you possibly can examine the Inventory Engine to know the place it might be missing that’s inflicting its P/E to commerce so low.

I belief my Inventory Engine. It does the heavy lifting for me.

Have a cheerful investing.