Kolkata: India’s sugar mills are staring at a margin squeeze this fiscal as restrictions on ethanol production from sugar-based feedstocks, rising sugarcane procurement costs and higher borrowing requirements erode profitability, even as firm sugar prices offer some revenue support, according to Crisil Ratings.
Operating margins of sugar mills are expected to decline by 140-160 basis points to around 6% this fiscal, as mills increasingly depend on sugar and extra neutral alcohol (ENA) sales following a sharp reduction in higher-margin ethanol production. Crisil’s analysis of 55 sugar mills, accounting for nearly a fourth of the country's sugar production last season, points to mounting pressure on both earnings and credit profiles.
The squeeze follows the government's decision to restrict ethanol production from sugarcane-based feedstocks to C-heavy molasses for ethanol supply year (ESY) 2027, marking a significant departure from previous years when nearly 10% of gross sugar production was routinely diverted towards ethanol.
The shift is expected to weaken the revenue mix of mills, as ethanol production from C-heavy molasses offers limited support, with administered prices remaining unchanged over the past three years. At the same time, a growing contribution from relatively lower-margin ENA sales is likely to weigh on overall profitability.
“Higher sugar prices will not fully compensate for the loss of higher-margin ethanol volumes and rising cane costs. As dependence on sugar and ENA sales increases, operating margins are expected to decline by 140-160 basis points to around 6% this fiscal,” said Anuj Sethi, senior director, Crisil Ratings.
The pressure is being compounded by higher sugarcane costs. The fair and remunerative price (FRP) of sugarcane has been raised by around 3% to Rs 365 per quintal for sugar season 2027. Any increase in Uttar Pradesh's state advisory price (SAP) could further push up procurement costs.
Sugar production is also expected to decline to around 29 million tonnes in SS2027 from 31.1 million tonnes a year earlier, primarily due to weather-related concerns affecting cane yields in key producing states. With consumption expected to broadly match production, domestic supply is likely to remain tight.
India has permitted imports of one million tonne of sugar during August-December 2026, marking its return to sugar imports after nearly a decade. While the move is expected to help augment domestic availability, additional imports and other supply-side measures could limit significant upside in sugar prices.
Against this backdrop, steady demand and firm realisations are expected to support 4-5% growth in the operating income of sugar mills this fiscal. However, higher revenues may not translate into better earnings as rising input costs and the loss of the ethanol cushion weigh on margins.
The impact is also expected to extend to the balance sheets of mills. Higher sugar prices will increase inventory valuations and working-capital requirements, pushing up borrowings. Combined with elevated interest costs and weaker operating profitability, this will put pressure on debt-servicing capacity.
Interest coverage of sugar mills rated by Crisil is expected to decline to around 2.7 times this fiscal from 3.7 times last fiscal.
“Credit pressure will be driven by moderating cash flows and higher funding costs. While capital expenditure remains modest, mills with sizeable debt repayments and limited financial flexibility will face heightened refinancing risks,” said Poonam Upadhyay, director, Crisil Ratings.
The industry's recovery prospects in fiscal 2028 will largely depend on the movement of sugar prices relative to cane costs, ethanol pricing and monsoon performance, which will determine the pace of earnings recovery and the resilience of mills' credit profiles.
