New Delhi [India], November 9 (ANI): Sugar mills are expected to face a 140-160 basis point decline in operating margins to around 6 per cent this fiscal year, as reduced ethanol production from sugar-based feedstocks, higher sugarcane procurement costs and rising funding requirements put pressure on profitability, according to a report by Crisil Ratings.

The report highlighted that the margin squeeze is expected despite firm sugar prices and an estimated 4-5 per cent growth in operating income, as higher sugar realisations are unlikely to fully compensate for the loss of higher-margin ethanol volumes and rising input costs.

Crisil stated, "As a result, operating margins and credit metrics are expected to weaken across the sector, increasing vulnerability, particularly among mills with sizeable near-term debt repayments.'

The report said the profitability of sugar mills is being affected by three factors: restrictions on ethanol production from sugar-based feedstocks, an increase in sugarcane prices and higher funding requirements.

For ethanol supply year (ESY) 2027, ethanol production from sugarcane-based feedstocks has effectively been restricted to C-heavy molasses.

This marks a significant shift from recent years, when nearly 10 per cent of gross sugar production was routinely diverted towards ethanol.

The report also shared that the sugar exports have also been curtailed following limited export permissions last season. At the same time, the fair and remunerative price (FRP) of sugarcane has been increased by around 3 per cent to Rs 365 per quintal for sugar season (SS) 2027.

Any increase in Uttar Pradesh's state advisory price (SAP) would further raise procurement costs for mills.

'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. As dependence on sugar and extra neutral alcohol (ENA) sales increases, operating margins are expected to decline by 140-160 basis points to around 6% this fiscal year,' said Anuj Sethi, Senior Director, Crisil Ratings.

The report's analysis covered 55 sugar mills, accounting for nearly a fourth of the country's sugar production last season.

Gross sugar production is 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. Consumption is expected to broadly match production, keeping the supply-demand balance tight.

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

Crisil expects sugar prices to remain firm, although additional imports and measures to ensure adequate domestic availability are likely to limit significant price increases.

Beyond operating profitability, higher inventory values and working-capital requirements are expected to increase borrowing needs for sugar mills.

The outlook for fiscal 2028 will depend on sugar prices relative to cane costs, ethanol pricing and monsoon performance. These factors will determine the pace of earnings recovery and the credit profiles of sugar mills. (ANI)