The bitter truth about sugar stocks: Why the ethanol induced rally may not last

Sugar stocks were on a tear after New Delhi sweetened its ethanol blending roadmap, sending shares of Balrampur Chini, Shree Renuka Sugars, Dhampur Sugar, and others higher in recent sessions. But the rally may soon lose steam, analysts warn, as India’s chronic production shortfalls and flat ethanol prices could limit mills’ incentive to divert cane away from sugar, undermining the bullish narrative.

Yesterday, the Supreme Court upheld the rollout of 20 percent ethanol-blended petrol, supporting the government’s roadmap, while the Centre removed all restrictions on producing ethanol from sugarcane juice, syrup, B-heavy, and C-heavy molasses for the 2025–26 marketing year. On paper, it looks like a win-win—more cane, more ethanol, more profits. In reality, the sweetness is tempered by structural challenges.

The bitter truth

Analysts at InCred Capital highlighted that sugar production forecasts rarely match reality. Every year, estimates start sweet but end up disappointing. Forecasts keep inflating, but outcomes collapse like a May heatwave—loud, sweaty, and brutally honest.

In 2023–24, output was projected at 34 million metric tonne (MMT), but the final number was closer to 29.5 MMT. For 2024–25, the estimate has already been cut from 35.5 MMT to 28 MMT. The new 35.25 MMT forecast for 2025–26 could face the same fate if rains disappoint or recovery rates dip.

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The brokerage firm maintained a "reduce" rating on sugar-based players such as Balrampur Chini and Triveni Engineering, citing policy headwinds, while recommending an “add” rating on grain-based distilleries like BCL Industries, Gulshan Polyols, and Globus Spirits.

While sugar production woes are just the tip of the iceberg, the detail lies in the devil, wherein mills don't prefer ethanol diversion over selling retail sugar. With India on track to hit its 20 percent blending target in CY25, sugar’s share in ethanol supply is shrinking because of poor margins.

Of the 7.23 billion litres supplied till July in Ethanol Supply Year 2025 (ESY25), only 38 percent came from sugar, with the remaining 62 percent were sourced from grains like rice and maize. The reason is simple: ethanol made from cane juice or B-heavy molasses is less profitable.

Ethanol diversion losing its sweetness

Analysts at JM Financial underlined the problem in pricing.

For example, in 2024–25, the Fair and Remunerative Price (FRP) of cane jumped to Rs 3,400 per quintal from Rs 3,050 in 2022–23. However, ethanol prices from B-heavy (Rs 60.73/litre) and juice (Rs 65.61/litre) haven’t been revised for over two years. With an average yield of 22 litres of ethanol per quintal of cane, revenue works out to roughly Rs 1,450, far below the FRP, resulting in negative margins.

By contrast, sugar prices in India have remained stable to strong (Rs 36–38/kg wholesale in 2024–25). Selling sugar directly at Rs 38.20/kg generates Rs 3,820 per quintal, substantially higher than ethanol revenues, making sugar sales the preferred route for mills despite policy incentives.

While government policies create an alternative revenue stream through ethanol blending, the current pricing structure does not make it financially compelling compared to traditional sugar sales.

With sugar production expected to rise and closing balances projected at 7–8 MMT for Sugar Season 2026 (SS26), analysts suggested the government could permit higher sugar exports, as sugar supply will likely absorb any incremental ethanol diversion.

So far this year, sugar stocks have delivered mixed results: Shree Renuka Sugars, Dhampur Sugar, and Dwarikesh Sugar have dropped up to 30 percent, whereas Balrampur Chini and EID Parry have risen as much as 22 percent.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.