Ethanol Production Curbs, Higher Cane Costs to Weigh on Sugar Mills' Profitability: Crisil Ratings

New Delhi, Nov 9 (KNN) Sugar mills' operating margins and credit profiles are expected to weaken in FY27 due to reduced ethanol production from sugar-based feedstocks, higher cane costs and rising borrowing requirements, Crisil Ratings said in a report.

The report highlighted that its analysis of 55 mills, accounting for nearly a fourth of last season's sugar production, expects operating margins to decline 140-160 basis points to around 6 per cent, despite firm sugar prices and 4-5 per cent growth in operating income.

The pressure follows restrictions on sugar-based ethanol production for ethanol supply year (ESY) 2027, effectively limiting output to C-heavy molasses. This reverses recent years' trend, when nearly 10 per cent of gross sugar production was diverted to ethanol. Limited export permissions have also curtailed sugar exports.

Meanwhile, the fair and remunerative price (FRP) of sugarcane has risen around 3 per cent to Rs 365 per quintal for sugar season 2027. Any increase in Uttar Pradesh's state advisory price (SAP) would further raise procurement costs.

Lower Production, Firm Sugar Prices

Gross sugar production is expected to fall to around 29 million tonnes in SS2027 from 31.1 million tonnes a year earlier due to weather-related concerns affecting cane yields. Consumption is expected to broadly match production, keeping supplies tight.

To support domestic availability, the government has permitted imports of 1 million tonne during August-December 2026, marking India's return to sugar imports after nearly a decade. Crisil expects prices to remain firm, although imports and other supply measures may limit further increases.

Higher sugar realisations are unlikely to offset the loss of higher-margin ethanol sales and rising cane costs. Ethanol from C-heavy molasses will provide limited support, with administered prices unchanged for three years. Greater dependence on sugar and extra neutral alcohol (ENA) sales is expected to weigh on margins.

Higher Borrowings to Weaken Credit Metrics

Firm sugar prices will increase inventory values and working-capital requirements, raising borrowing needs. Combined with weaker profitability and elevated interest costs, this is expected to reduce interest coverage for Crisil-rated mills to around 2.7 times in FY27 from 3.7 times last fiscal.

Mills with sizeable near-term debt repayments and limited financial flexibility face higher refinancing risks, despite modest capital expenditure.

Crisil said the sector's FY28 outlook will depend on sugar prices relative to cane costs, ethanol pricing and monsoon performance, which will shape earnings recovery and credit quality.

(KNN Bureau)