Sugar Mills Face 140-160 Bps Margin Hit, Higher Cane Costs Bite
Sugar mills are facing a profitability crunch due to limitations on ethanol production from sugar-derived feedstocks, increased sugarcane procurement expenses, and escalating borrowing requirements. Although stable sugar prices are anticipated to aid revenue growth, they might not compensate for the decline in higher-margin ethanol sales and increasing expenses.
Crisil Ratings anticipates a reduction in operating margins throughout the sector by 140–160 basis points, bringing them to approximately six percent this fiscal year. The analysis included 55 mills, representing almost a quarter of India's sugar output from the previous season.
The pressure stems from policy actions focused on guaranteeing sufficient local sugar supplies due to anticipated decreased cane production. For the ethanol supply year (ESY) 2027, production from sugarcane-derived feedstocks has predominantly been limited to C-heavy molasses.
This indicates a significant change from previous years, when close to 10 percent of total sugar output was consistently redirected for ethanol production.
The industry is also encountering increased input expenses. The fair and remunerative price (FRP) of sugarcane has been increased by approximately three percent to Rs.365 per quintal for the sugar season (SS) 2027. Any rise in Uttar Pradesh's state advisory price (SAP) might increase the burden.
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Crisil anticipates that gross sugar output will decrease to approximately 29 million tonnes in SS2027, down from 31.1 million tonnes the previous year, primarily due to weather-related issues impacting cane yields in important states. As consumption is anticipated to closely align with production, the balance between supply and demand is expected to stay tight.
The government has allowed the import of one million tonnes of sugar from August to December 2026, indicating India's comeback to importing after almost 10 years. This, along with additional actions to safeguard local supply, is anticipated to restrict any significant rise in sugar prices.
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Consistent demand and stable realisations are anticipated to sustain a 4-5 percent increase in the operating income of sugar mills this fiscal year. Nonetheless, the move away from more profitable ethanol production, along with increased cane expenses and a larger share from lower-margin extra neutral alcohol (ENA) sales, is expected to impact profitability negatively.
Ethanol derived from C-heavy molasses will provide only minimal assistance, as the set prices have remained the same for the last three years.
The pressure extends beyond just earnings. Stable sugar prices will elevate the worth of inventories and boost working-capital demands, leading to higher borrowings. Decreased operating profitability and increased interest expenses are anticipated to impair debt repayment capacity.
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The industry's forecast for fiscal 2028 will hinge on the trend of sugar prices in relation to cane expenses, ethanol rates, and rainfall outcomes. These elements will influence if mills can regain margins and stabilize their credit standings.