Sugar mills' operating margins could fall to just 6% this fiscal; here's why

Indian sugar mills' operating margins are expected to fall 140-160 basis points this fiscal as restrictions on ethanol production and higher cane costs squeeze profitability, Crisil Ratings said on Monday.

Margins are forecast to decline to around 6%, despite a projected 4-5% growth in operating income, supported by steady sugar demand and firm realisations.

The pressure follows government restrictions on ethanol production from sugarcane juice, sugar syrup and B-heavy molasses for the 2027 ethanol supply year, effectively limiting production to C-heavy molasses.

"The Government of India has issued directions that sugar diversion for ethanol be reduced to zero for ethanol supply year 2026-27," the tender document issued on behalf of OMCs said.

"No offers have been sought for ethanol produced from sugarcane juice, sugar or sugar syrup and B-heavy molasses in this quantity bid tender," the document added.

In recent years, mills routinely diverted nearly 10% of gross sugar production towards ethanol.

The shift will reduce the contribution of higher-margin ethanol sales, while mills face rising cane procurement costs.

The fair and remunerative price (FRP) of sugarcane has been raised by around 3% to ₹365 per quintal for the 2027 sugar season.

Any increase in Uttar Pradesh's state advisory price (SAP) would add to the cost burden.

"The earnings profile of sugar mills is undergoing a structural shift. Higher sugar prices will not fully compensate for the loss of higher-margin ethanol volumes and rising cane costs," said Anuj Sethi, senior director at Crisil Ratings.

Ethanol production from C-heavy molasses will provide limited support as administered prices have remained unchanged over the past three years.

Mills are also expected to rely more on sugar and extra neutral alcohol (ENA) sales, which offer lower margins.

India's gross sugar production is expected to decline to around 29 million tonnes in the 2027 season from 31.1 million tonnes a year earlier, primarily due to weather-related concerns affecting cane yields in key producing states.

The government has permitted imports of 1 million tonnes of sugar during August-December 2026 to address supply concerns, marking India's return to sugar imports after nearly a decade.

The pressure on profitability is also expected to weaken the sector's credit metrics, as higher sugar prices inflate inventory values and increase working-capital requirements.

Combined with higher interest costs and weaker operating earnings, this is expected to reduce debt-servicing capacity.

The sector's outlook for fiscal 2028 will depend on sugar prices relative to cane costs, ethanol pricing and monsoon performance, Crisil said.