Pan-India cement makers Ambuja Cements Ltd and ACC Ltd have put their full-fledged merger on hold. Instead, they have replaced it with a swap of materials and services.

The Ambuja Cements management had first indicated the possibility of a merger in 2013. Last May, a special committee of directors was formed to analyse the merger proposal.

Calling off the merger has obviously not gone down well with the Street. The prospect of a full merger was keenly awaited and it was perhaps the only company-specific upside trigger for both stocks.

While details of the proposed clinker and cement swaps are awaited, since Ambuja Cements already holds majority stake in ACC, procurement-based synergies are likely to have been realized much earlier.

In simple terms, now that the much-awaited merger is put on the back-burner, movement in these stocks will be largely driven by sector-based trends. And that is not great news, because a turnaround in cement remains a distant dream, keeping realizations weak, while at the same time operating margins are getting squeezed as input costs have increased.

Both stocks took a beating on Tuesday, mirroring the Street’s sour sentiments on this development.

Between the two, the Ambuja Cements stock, seen as a greater beneficiary of a full merger, took a sharper knock, ending the day’s session down nearly 4%. If the pressure on the stocks continues, they might touch levels last seen in May 2017 (see Chart 1).

Currently 42 broking houses track the ACC and Ambuja Cements stocks with a comparatively higher number of “sell" and “neutral" ratings on both the stocks (see Chart 2).

Though analysts haven’t immediately downgraded ratings or changed their earnings estimate on either of the companies, one cannot rule out the possibility of more brokerage firms turning negative on these cement makers since in the current environment, synergy benefits would be limited.

While the management maintains that a merger remains a long-term goal for both the companies, lack of clarity on its timeline has turned this potential merger from an opportunity to an overhang for investors in these stocks.

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