NARSEE MONJEE INSTITUTE OF MANAGEMENT STUDIES

SCHOOL OF BUSINESS MANAGEMENT

Optimization Modelling for Business Decisions

Group Project

Infosys’ Share Price and Revenue Forecasting

FTMBA, Trimester 2, 2021-22

Submitted To Faculty: Dr. Akshay G Khanzode

Submitted By: Group 6 – Division D – I Year

Team Member SAP ID Roll No

Mohit Agarwal 80512100727 D006

Abhay Kumar Singh 80512100251 D016

Prakriti Tiwari 80512100588 D017

Pranjal Verma 80512100238 D046

Amber Goel 80512100735 D056

Objective

The project is envisioned to help forecast the trajectory of the IT space in India. For the same,
we have selected Infosys as our company to be studied. We have forecasted the following
metrics:
1. The quarterly revenue 
2. Stock Price of the next day 
3. Stock Price of the next 100 days 

About Infosys

Infosys Ltd is a worldwide technology services company that develops, builds, and
implements IT-enabled business solutions for its clients. Technical consulting, design,
development, product engineering, maintenance, systems integration, package-enabled
consultation, and implementation and infrastructure management services are among the
services provided by the company for its clients. As of March 31, 2021, the Company was
present in 220 sites throughout 46 countries.

The amount of outperformance has only increased post-covid. Infosys' dollar revenues have
increased by 2.1 percent over the last three quarters, whereas TCS' revenues have decreased
by 2.9 percent. Furthermore, because to a recent sharp increase in the former's profit margins,
its operating profit has increased by 18.1 percent post-covid, but TCS' profit has only
increased by 1.7 percent. Infosys has been at the vanguard of the transformation and
acceleration theme, which has been a driving force behind IT spending.

Research and Literature Review 

What is Forecasting

Forecasting is a crucial tool for making sound business decisions. Forecasting aids
management in anticipating trends in crucial business indicators such as sales expectations or
customer behavior, regardless of a company's size or profile. Forecasting is a technique for
producing well-informed forecasts by using past data as the primary source of information for
predicting future trends. Forecasting is used by businesses for a variety of reasons, including
estimating future spending and selecting how to allocate their budget. Forecasting is a useful
asset, but it demands specialized knowledge and accurate data.

Types of Forecasting

Naive Forecasting Method 

The technique of naive forecasting is used when the previous period's sales are utilized to
anticipate the following period's sales without making any forecasts or altering the
components. The final observed value is identical to the forecasts made using a naive
method. 
The simplest of all forecasting approaches, naive forecasting is appropriate for finance and
sales departments since it guarantees that both departments work together to develop the
firm. 
In Microsoft Excel, the naïve forecasting technique does not provide a final prediction;
instead, it gives information about the "system." The "system" refers to the market or industry
that you're predicting in.

Moving Average Method 

A moving average is a method for determining the overall trends in a data collection by
taking the average of any subset of numbers. For predicting long-term trends, the moving
average method is highly effective. It can be calculated for any relevant time period. A five-
year, four-year and three-year moving average can be computed. A 50 or 200 day moving
average is frequently used by stock market analysts to help them in detecting trends in the
stock market and anticipate where the stocks are heading. The central value of a collection of
numbers is represented by an average.

Linear Trend Projection 

This technique of forecasting implies that data has a pattern that varies over time. We may
use the regression approach to get the trend equation if the trend is linear (straight line).
When your business's driving forces influence your measurements in a linear way, trend
forecasting provides the most accurate forecasting. It's a type of basic regression model in
which the dependent variable is simply a time index variable, such as 1, 2, 3,... or another
evenly spaced series of integers.
Weighted Moving Average Model 

In the weighted moving average (WMA) method recent data points are given more weight,
whereas older data points are given less. Every observation in the data collection is multiplied
by a weighting factor which is decided beforehand to generate the weighted moving average.

The weighted moving average is considered more accurate than the simple moving average in
determining the direction of the trend since it applies identical weights to all integers in the
data set.

Where n is the time period.

Exponential Smoothing Model 

Exponential smoothing forecasts use the weighted averages of all the previous observations,
with the weights decaying exponentially as the observations get older. 

The primary goal of exponential smoothing is to smooth original series in the same way that
the moving average smooths them out and to utilize smoothed data to estimate future values.

The smoothing parameter (alpha) is always used to determine the weight of each parameter.

The value of (alpha) ranges from zero to 1:

(alpha)=0, gives more weights to historical data

(alpha)=1, gives more weights to recent observations

Where alpha = smoothing parameter and t = time period

ARIMA 

ARIMA (Auto-Regressive Integrated Moving Average) is a class of models that is

instrumental in explaining a time series based on their previous values including their lags
and lagged prediction errors so that the equations can be used to predict and anticipate the
future values.

The following are the parameters of the ARIMA model:

p: The lag order, or the number of lag observations incorporated in the model.
d: The degree of difference is the number of times the raw observations are different.
q: The order of moving average, also known as the size of the moving average window.

While our models are fairly accurate in predicting future values there are occasions when
certain events which affect our forecast occur but cannot be predicted. A few examples of
such events are :

 2008 Financial Crisis

The 2008 financial crisis started with the collapse of the US housing market and
spread like a contagion and had a substantial and prolonged effect on the world
economy. Such an event could not be predicted and factored in our analysis.

 Covid-19 Pandemic
The recent pandemic induced a complete shutdown of the economy with it severely
affecting mobility all around. This created an environment of extreme uncertainty
with it affecting the stock market and induced heavy selling with decreased revenue
forecasted. This affected the forecasting. 

 Increased digital adoption

Not all unforeseen events affect the underlying negatively. The increased pace of
digital adoption had a positive effect on the revenue and the share prices of the
company. While unforeseen this came as a welcome event for the company.

Advantages of Revenue Forecasting

 You will be able to negotiate for more acceptable or controllable conditions when you
require credit by using revenue forecasts.
 It enables you to make informed judgments about which items or services to
discontinue based on low margins or sales. You can then replace these items with
those that benefit your gross profit, which is, of course, fantastic for your business.
 Helps in setting proper budgets before things get started if you forecast your revenue.
This not only helps you plan for the following year but also serves as a point of
reference for when you want to review your progress later in the year. Furthermore,
you will be able to stick to your budgeting goals.
 The practice equips your company with the information (and power) to make sound,
well-informed decisions about team expansion. It tells you how many additional
employees you'll be able to hire and how much you'll be able to pay each of them.
 Revenue forecasting enables more effective strategic planning and also offers you an
idea of when you'll be able to start putting your goals into action. For instance, you'll
know when it's ideal to invest to get the most bang for your buck.
 Investors respond well to revenue forecasts, especially when it is combined with
market trends. When it comes to getting investors to invest in your company, a clear,
detailed, and complete revenue estimate can help you win the game.
Our Methodology

Collection of data
We have collected the datasets from Yahoo Finance and the quarterly financial reports filed
by Infosys in the US GAAP format. 

Data cleansing
We examined the data thoroughly and cleansed the data by removing all null values and
substituting them with the average of the past 3 months to make the model more accurate and
reliable.

Visualization of data
We have plotted graphs to identify trends and seasonality in our data.

Trend Analysis
We observed the patterns in the graph to look for trend, cyclicity, and seasonality.

Measurement of errors

Mean Absolute Percentage Error: Because the magnitude of MAE and MSE is dependent
on the scale of the data, making comparisons across time intervals is challenging. We must
use relative or percentage error metrics to conduct such comparisons. The MAPE is the
average of the forecasts' absolute percentage errors.

Mean Absolute Error: This method eliminates the issue of positive and negative mistakes
cancelling each other out. It's the average of the predicted errors' absolute values.

Mean Squared Error: Another way to avoid the problem of positive and negative mistakes
balancing each other is to use this method. It's the average of predicted errors squared.

Selection of appropriate forecasting method

Based on the error values obtained in the following forecasting methods:
 Linear Forecasting
 Exponential Smoothing
 5 Day MA
 10 Day MA
 ARIMA

Data Source 
 Quarterly financial reports of Infosys
 Yahoo finance stock prices data
Analysis and Findings

Revenue Forecasting

Method  MAE MSE MAPE

Linear Trend Projection 63.7 6887.33 3.871%

Exponential Smoothing 96.84 4340.50 4.867%

Short Term share price forecasting

Moving Average 

Method  MAE MSE MAPE

5 Day Moving Average 6.085 120.59 2.57%

10 Day Moving Average 7.722 190.81 3.22%

ARIMA Model

Step 1: Import the CSV file containing the dataset

Step 2: Find the order of the AR term (p)

Step 3: Find the order of the MA term (q)

Step 4: Build optimal ARIMA model using Out-of-Time Cross-validation

For the parameters AR(p) Autoregression, I(d) Integration, and MA(q) Moving Average.
Some of the combinations we tried were:

Case 1: p = 3, d = 2 and q = 1
Case 2: p = 1, d = 1 and q = 1

Case 3: p = 1, d = 2 and q = 1
 Method  MAE MAPE

ARIMA (p = 3, d = 2 and q = 1) 66.15 11.95%

ARIMA (p = 1, d = 1 and q = 1) 94.40 15.54%

ARIMA ( p = 1, d = 2 and q = 1) 103.33 14.65%

Conclusion

Revenue forecasting: Out of Linear Trend Projections and Exponential Smoothing, we have
chosen the first method since it gives the lesser value of MAPE. 

Short-term stock price forecasting: Out of 5 Day Moving Average and 10 Day Moving
Average, we have chosen the first one since it gave the least value of MAE, MSE, and
MAPE.

Long-term stock prices forecasting: Out of 3 cases of ARIMA with different parameters,
Case 1 with p = 3, d = 2, and q = 1 gives the least MAPE and is the most optimized model.

Limitations

Apart from time-series forecasting depends on many other factors that are difficult to track:
 Economic factors (GDP, Inflation, Repo rates, etc.)
 Crisis (Pandemic, economic crisis like 2008 crash)
 Changes in government policy (global and national)
 Sudden explosion in demand (Y2K)
Insights and Implications

Forecasting of revenues and stock prices helps businesses and investors and all other
stakeholders take better decisions. Some of the areas which are positively impacted are:
 Hiring
 Mergers and Acquisitions
 Infrastructural expansion
 Training and development
 Selection of stocks to invest in

References

 Pattison S. (2014), Revenue Forecasting – knowing the future is possible. Capital

Ideas Vol 57 issue 2. 
 Lakshmi Yermal, P. Balasubramanian, "Application of Auto ARIMA Model for
Forecasting Returns on Minute Wise Amalgamated Data in NSE", Computational
Intelligence and Computing Research (ICCIC) 2017 IEEE International Conference
on, pp. 1-5, 2017
 https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/
weighted-moving-average-wma/
 https://www.analyticssteps.com/blogs/tutorial-exponential-smoothing-and-its-types
 https://otexts.com/fpp2/index.html
 http://nsdl.niscair.res.in/jspui/bitstream/123456789/829/1/CHAPTER-
6%20FORECASTING%20TECHNIQUES-%20Formatted.pdf

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