Gross sugar production is likely to rise 15% in the 2026 sugar season to about 35 million tonne, aided by above average monsoons, boosting cane acreage and yields in key sugar producing states such as Maharashtra and Karnataka, says a report.
The growth is expected to ease tightness in domestic supply and has the potential to boost ethanol diversion and revive exports with appropriate policy support. This would offer sugar mills some relief from the challenges of high cane cost, subdued ethanol prices and muted exports that compressed their operating profitability by 200 bps to 8.7-9% in fiscal 2025, Crisil Ratings said in a report Friday.
In fiscal 2026, with improved supplies and potentially higher diversion of sugar for blending ethanol with gasoline, the operating margin of sugar mills is likely to recover to about 9-9.5%. This should support credit profiles of sugar players, which saw some pressure last fiscal, said the report, based on 54 sugar mills with total revenue of Rs 70,000 crore in fiscal 2025.
Over the past two seasons (October to November), the fair and remunerative price of sugarcane has risen 11%, ethanol prices have largely remained unchanged, compressing the miller’s revenue-cost dynamics.
In the 2026 sugar season, diversion for ethanol is expected to rise to 4 million tonne (from 3.5 million tonne in 2025), supported by high output and the 20% blending target (19% average achieved so far), as it offers faster cash-flow churn.
According to Anuj Sethi, a senior director with the agency, the strategic diversification to ethanol is intended to de-risk earnings and cash flow of sugar mills. But rising cane cost (cane price has been hiked by 4.5% to Rs 355/quintal for 2026) and stagnant ethanol procurement prices have limited improvement in profitability. As a result, operating margin is likely to improve only marginally by 40-60 bps to 9-9.5% despite a 15% jump in sugar output.
Meanwhile, domestic sugar prices have held steady at Rs 35-38/kg this season and with expected rise in output, prices are likely to remain range-bound, limiting any significant upside in profitability of sugar millers.
Exports, restricted at 1 million tonne in 2025 owing to domestic supply concerns, can comfortably continue at similar levels in 2026 with high sugar output and opening inventory of 2 months of consumption.
According to Poonam Upadhyay, a director with, sugar inventory levels at the end of fiscal 2026 are expected to remain at levels similar to last year, limiting the rise in working capital debt despite higher distillery operations. With capital spends restricted to routine modernisation, overall debt levels of integrated players are expected to remain under control.