What's going on with Asian Paints?

Nov 13, 2024

Our goal with The Daily Brief is to simplify the biggest stories in the Indian markets and help you understand what they mean. We won’t just tell you what happened, but why and how too. We do this show in both formats: video and audio. This piece curates the stories that we talk about.

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In today’s edition of The Daily Brief:

Why did profits fall by 40% this quarter for Asian Paints
Is India collecting less property tax?

Why did profits fall by 40% this quarter for Asian Paints?

The paints industry in India is a major part of the economy. It goes beyond simply adding color to our walls; it reflects the health of the economy itself. Think of it like this—when people are spending on home improvements, like painting, it often shows they feel financially secure. But when they hold off on these expenses, it can indicate caution or concerns about the future.

Recently, some of the biggest paint companies in India—Asian Paints, Berger Paints, Akzo Nobel India, and Kansai Nerolac—shared their quarterly earnings reports. We’re highlighting them today because they shed light on both the opportunities and challenges shaping this market. So, let’s break down the key trends driving the paint sector in India right now.

First up is the impact of the monsoon on demand. In India, the monsoon season plays a significant role in the paint industry, especially in rural areas. Painting projects typically start once the rains end, as damp walls can affect paint adhesion, drying times, and durability. Dry weather ensures a smoother and longer-lasting finish, making it the ideal time for painting.

This year, however, the monsoon lasted longer than usual. This delay pushed back many projects, particularly in rural and semi-urban areas where there’s high demand for decorative paints. With less time left to hit their annual sales targets, this delay could impact the industry's overall performance for the year.

Next, let’s talk about the different demand trends in urban and rural areas. There’s an interesting contrast between the two.

Demand has stayed fairly steady in rural regions, partly due to a good monsoon season boosting farmers' incomes. On the flip side, city dwellers have been cutting back on non-essential spending, like redecorating, as they grapple with rising living costs.

Usually, the festive season—especially Diwali—boosts paint sales. But this year, urban consumers were more cautious with their spending, which has affected the earnings of major paint companies. These companies often rely on the festive season to hit their targets.

By the way, we went into more detail on the changing dynamics between urban and rural demand in one of our episodes last week. Feel free to check that out when you’re done here!

Moving on, the third factor we need to talk about is how new competition is shaking up the paint market.

One of the biggest disruptions is Grasim Industries stepping into the sector with its paint brand, Birla Opus, backed by the Aditya Birla Group.

This is significant because they’ve made a massive investment of about ₹10,000 crore. With this backing, Birla Opus is offering high-quality paints at very competitive prices, putting pressure on established market leaders like Asian Paints. To keep their market share, companies like Asian Paints have started offering discounts and rebates. But, of course, this strategy is starting to take a toll on their profit margins.

Traditionally, brands like Asian Paints have held a premium spot in the market with little strong competition. But with a new player investing heavily, everyone is being forced to rethink their pricing strategies.

This brings us to our fourth point: the move towards premium products. To counteract pricing pressures, established brands are shifting their focus to premium offerings, such as high-end decorative paints and waterproofing solutions. These products are targeted at wealthier customers who are less affected by inflation and willing to pay more for better quality. For example, Berger Paints has seen growth in its premium lines, and Asian Paints reports steady demand for its waterproofing and interior solutions. While premium products show promise, they still make up a smaller part of overall sales, so they won’t completely shield companies from challenges in the mainstream market.

To capture potential demand as the monsoon’s effects wear off, companies like Berger Paints are also expanding their dealer networks. By opening more outlets, they can reach more customers in both urban and rural areas, positioning themselves for a demand rebound.

The fifth point we’d like to touch on is how companies are leaning on industrial coatings for stability. While sales of decorative paints have been bumpy, industrial coatings are proving to be a more consistent source of income. These coatings are used in industries like automotive and infrastructure, where ongoing projects provide steady demand.

Companies such as Akzo Nobel India and Kansai Nerolac have benefited from regular orders tied to large infrastructure projects, like metro construction and road building. This demand from industrial clients helps balance out some of the ups and downs in the decorative segment, offering a stable revenue stream even when consumer demand fluctuates.

Overall, India’s paint industry is going through a transitional phase. The sector is juggling current challenges—like the delayed monsoon and increased competition—while also exploring new opportunities in premium products and industrial coatings.

With the end of the rainy season, companies are hopeful that delayed rural projects will pick up again, boosting demand. However, the industry’s future will also depend on broader economic trends: consumer confidence, the impact of inflation on disposable incomes, and how well-established players adapt to a changing market. In the coming months, the performance of the paints industry will reflect not only how companies handle these pressures but could also offer insights into India’s overall economic mood.

Is India collecting less property tax?

In the next story, let’s talk about something that impacts every homeowner in India—property taxes. For context, property tax is an annual fee that homeowners pay to their local government, determined by specific factors like the size or location of their property.

While it may seem like just another regular expense, property taxes play a big role in determining why some cities have smooth, well-lit roads, while others deal with potholes and water shortages.

Recently, the International Monetary Fund (IMF) released a report that shed some light on property taxes around the world, and India’s numbers were surprising. In simple terms, India collects far less in property taxes compared to other countries, which has serious consequences for how our cities function.

So, let’s break it down step-by-step to understand what’s really happening. The IMF report found that India collects just about 0.1% of its total GDP from property taxes. For comparison, most developed countries collect anywhere from 1% to 3% of their GDP through property taxes.

This low level of property tax collection affects the services our cities can offer. Less tax revenue means less money for maintaining roads, ensuring reliable water supply, managing waste, and more. As you’d expect, this is a key difference between cities that function smoothly and those that don’t.

To understand this a bit better, let’s look at how property taxes are actually calculated in Indian cities. Most cities use what’s called an “Area-Based Assessment.” Instead of trying to estimate the market value of each property, which can be complicated and inconsistent, they focus on the size of the property. In simple terms, the bigger the property, the higher the tax.

Now, even though this sounds straightforward, here's where it gets interesting.

Take Delhi, for example. They’ve taken the basic property tax calculation a step further with what they call the "Unit Area Method." It’s like an upgraded way of figuring out property tax. Here’s how it works: they start with the size of the property, but they don’t stop there. They then multiply it by different factors based on where the property is located and how it’s used.

For example, if the property is in a high-end area, there’s a higher multiplier. If it’s an older building, the rate might be lower. If it’s a commercial property, it has its own rate. So, they’re trying to get a more accurate picture of the property’s value and use, not just its size.

On the other hand, some cities still rely on an older system called the “Annual Rental Value” method. This system tries to estimate how much rent your property could earn, even if you’re living in it yourself.

The big issue with both of these systems is that they’re still not collecting as much tax as they should.

So, why is that? According to the IMF report, there are three main problems:

Many properties aren’t even registered for tax. In cities like Bangalore, authorities have reportedly discovered thousands of properties that had never paid any taxes. They found these properties using satellite mapping, which captures aerial images of buildings and compares them with official records.
Even for properties that are registered, the tax collection process is often outdated and inefficient. Many cities still rely on paper records, making it easy for properties to slip through the cracks. For example, when Bangalore switched to a digital system using satellite mapping, they didn’t just uncover unregistered properties—they also found that many registered properties had added new floors or extended existing structures without reporting these changes. This meant they were being under-taxed.
The methods used to calculate taxes aren’t always effective either. Because they’re often based on broad estimates rather than accurate property values, they can miss out on capturing the real value or usage of a property, leading to lower tax collection.

The good news is that India isn’t alone in facing these challenges, and there are examples from around the world showing how to improve property tax collection. Take Lagos in Nigeria, for example. By modernizing their property tax system, they increased their tax collection fivefold, going from a few hundred million dollars to over a billion. Or consider South Korea, where property transaction taxes range from 1% to 7% of the property’s value. These aren’t just statistics—they’re real-life cases that show how the right systems can lead to significant improvements in property tax collection.

That said, some Indian cities have already begun taking steps in the right direction. Delhi and Bangalore, for instance, are using satellite imagery to map every property in their cities. The goal isn’t just to catch people who aren’t paying, but to make the system fair for everyone. When all properties are accounted for and everyone pays their share, the overall tax rate can be lower because the burden is spread more evenly.

According to the IMF, India could realistically aim to collect ten times more in property taxes than it does today. This isn’t just wishful thinking—it’s based on real examples from cities around the world that have modernized their systems.

Here’s why this is so important: The IMF estimates that countries like India need additional funding of about 4% of their GDP to meet sustainable development goals, covering everything from infrastructure to healthcare. For low-income countries, that need jumps to around 16% of GDP. When cities can efficiently collect their own property taxes, they gain the ability to fund essential services independently, without having to rely as much on state or central government handouts.

A stable revenue stream from property taxes also allows cities to plan better. Instead of being reactive and only fixing problems when they become urgent, they can think ahead. They can invest in long-term projects like underground drainage systems or modern waste management facilities.

Of course, these improvements aren’t just “nice-to-have” additions; they’re necessary for cities that are growing quickly.

So, here’s the takeaway: Nobody likes paying taxes, but if we want our cities to work better, they need resources. The difference between a city that runs smoothly and one that struggles often comes down to how well it can collect property taxes.

Tidbits:

By FY 2027, Apple plans to produce 32% of its global iPhone volume and 26% of its value in India, targeting over $34 billion in production value. India’s iPhone production reached $14 billion in FY 2024 (12-14% of global volume) and is projected to rise to $18 billion by FY 2025, with India’s share growing to 17-18%.
India's online gaming market grew 23% year-on-year to $3.8 billion in FY 2024, driven by a 41% rise in in-app purchase revenue. Real Money Gaming (RMG) contributed $2.4 billion, with mid-core games up 53%. The market is expected to reach $9.2 billion by FY 2029, maintaining a 20% CAGR as interest shifts to recreational, non-RMG gaming.
The Adani Group is investing $5 billion in India’s metal industry, targeting copper, iron, and steel production. Leveraging its power and transport networks, Adani aims to challenge major players like Vedanta and Tata by keeping costs low.

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