In a move that did not surprise too many people, Mercedes Benz India Ltd. has approached the Board for Industrial and Financial Restructuring (BIFR) as its losses have exceeded its networth by more than 50%.
According to the Sick Industrial Companies Act (SICA), when a company's accumulated losses erode more than 50% of its networth, then it is deemed 'potentially sick'. Mercedes has posted losses of Rs 3.3 bn on an equity base of Rs 6 bn. This was reported by a leading financial daily.
Mercedes is yet only potentially sick, which means that it does not yet have to take orders from BIFR, and can take decisions independently. However, potential sickness is the first step towards sickness, and when that happens Mercedes will have to take instructions from BIFR to effect a turnaround.
The major reasons for higher accumulated losses include longer gestation period of the premium car segment, cost elevation and low volumes in the upper-end of the car market. As dependence on imports is very high, the company has been adversely over the years by the falling rupee vis-à-vis the US dollar.
Mercedes' poor show despite a reliable brand name is a reflection of the sorry state of MNC car majors in the country. In addition to Mercedes, MNC giants like General Motors, Ford and Honda have also set up base in the country. The performance of these companies is only slightly better than that of Mercedes. But they still have to post any significant profits. Others like Skoda and Toyota are waiting in the wings to launch their models.
Apparently, MNC car majors were done in by Indians huge middle/upper middle class population, and outlined ambitious plans to take the country by storm. But the reality was different, and these companies found that there was a very small market for a Rs 700,000+ premium car. These companies are still struggling against Maruti's wide range and extensive distribution network.
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