Sugar Mills Hit by Margin Squeeze: Ethanol Slump and Rising Cane Costs Bite
Crisil Ratings predicts a 140-160 bps drop in sugar mill margins as ethanol earnings dip and sugarcane costs rise.
The Indian sugar industry is bracing for a challenging financial period. According to a recent report by Crisil Ratings, sugar mills are projected to experience a significant sugar mills margin squeeze, with operating margins expected to decline by 140-160 basis points, dropping to approximately 6 per cent this fiscal year.
Despite a projected 4-5 per cent growth in operating income driven by firm sugar prices, the report suggests that these gains will not be enough to offset the combined impact of falling ethanol revenues and escalating procurement expenses.
The Triple Threat to Profitability
Crisil identifies three primary factors that are currently weighing down the earnings profile of the sector:
- Ethanol Production Restrictions: For the ethanol supply year (ESY) 2027, production from sugar-based feedstocks has been effectively restricted to C-heavy molasses. This is a drastic shift from previous years, where nearly 10 per cent of gross sugar production was typically diverted to ethanol, a higher-margin product.
- Rising Cane Costs: The Fair and Remunerative Price (FRP) for sugarcane has seen an increase of about 3 per cent, reaching Rs 365 per quintal for the sugar season (SS) 2027. Additionally, any hike in the State Advisory Price (SAP) in Uttar Pradesh could further inflate procurement costs.
- Increased Funding Needs: Higher inventory values and greater working-capital requirements are pushing mills to borrow more, increasing their financial vulnerability.
"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," stated Anuj Sethi, Senior Director at Crisil Ratings.
Production Slump and the Return of Imports
The industry is also grappling with a dip in output. Gross sugar production is expected to fall to around 29 million tonnes in SS2027, down from 31.1 million tonnes the previous year. This decline is primarily attributed to weather-related issues that have impacted cane yields in major producing states.
With consumption expected to nearly match this lower production, the supply-demand balance remains tight. In a move that marks India's return to sugar imports after nearly a decade, the government has allowed the import of 1 million tonnes of sugar between August and December 2026 to ensure domestic availability.
Looking Ahead: Credit Risks and Recovery
While sugar prices are expected to remain firm, Crisil warns that additional imports and government interventions to maintain supply may cap any significant price surges. This creates a precarious situation for mills, especially those with substantial near-term debt repayments, as their credit metrics are expected to weaken.
The recovery for the 2028 fiscal year will hinge on several volatile factors, including:
- The balance between sugar prices and the cost of sugarcane.
- Future ethanol pricing policies.
- The performance of the monsoon, which will dictate future cane yields.
The analysis conducted by Crisil covered 55 sugar mills, which together represented nearly a quarter of India's total sugar production in the previous season.