Sugar Sector: ICRIER Urges India To Cut Ethanol Blending To 15% During Supply Shocks

Market snapshot: An ICRIER research paper co-authored by agricultural economist Ashok Gulati recommends that the Indian government adopt a flexible approach to its Ethanol Blended Petrol (EBP) programme. The report suggests keeping the E20 target as a long-term goal but allowing a temporary cut to E15 (15% blending) during feedstock shortages or severe food-price pressures.

Data Snapshot

• Modal retail sugar prices in India surged 44% from ₹45 per kg in July to ₹65 per kg by August 29, 2026.
• EID Parry reported a 42.5% YoY decline in consolidated profit attributable to owners to ₹141.60 crore for the quarter ended June 30, 2026.
• Ethanol supplied to oil marketing companies grew from 173.03 crore litres in ESY 2019–20 to a projected 12 billion litres in ESY 2025–26, representing a CAGR of approximately 38%.

What's Changed

• Retail sugar prices in India surged by 44%, climbing from ₹45 per kg in July 2026 to ₹65 per kg by late August 2026.
• EID Parry’s consolidated net profit dropped 42.5% YoY to ₹141.60 crore in Q1 FY27, down from ₹246.28 crore in Q1 FY26.

Key Takeaways

• ICRIER recommends a flexible 'E15 safeguard' that allows the government to temporarily reduce blending from E20 to E15 during supply shortages, insulating food security.
• The rapid expansion of India's Ethanol Blending Programme (achieving E20 in ESY 2025-26, five years ahead of schedule) has outpaced raw material production, with sugarcane output growing at only a 5.1% CAGR compared to 38% for ethanol demand.
• Government interventions like duty-free raw sugar imports and dealer stock limits are putting downward pressure on domestic ex-mill sugar prices, compressing margins for sugar mills.

SAHI Perspective

ICRIER's proposal highlights a structural risk for integrated sugar mills like EID Parry, which have heavily invested in distillery capacities. If the government acts on this and cuts blending mandates to 15% during supply disruptions, ethanol off-take volumes could face temporary cuts, impacting high-margin biofuel revenues. However, it also prevents severe sugar stock depletion, offering a long-term balancing act for the industry.

Market Implications

A shift to a flexible E15-E20 blending target could create policy uncertainty for ethanol distilleries, causing a de-rating of sugar and bio-energy stocks in the near term. If food security concerns force the government to limit sugar-to-ethanol diversion, mills will have to rely more on domestic sugar sales, where margins are vulnerable to government-imposed stock limits and imports.

Trading Signals

Market Bias: Bearish

A proposed blending reduction to 15% during supply shocks, coupled with EID Parry's 42.5% YoY net profit decline to ₹141.60 crore and a 20% correction in ex-mill sugar prices, creates significant near-term headwind.

Underweight: Sugar, Biofuels

Trigger Factors:

• Notification from the Ministry of Consumer Affairs or Ministry of Petroleum regarding a reduction in ethanol blending targets
• Further downward correction of ex-mill sugar prices below ₹55 per kg
• Changes in raw sugar import quotas and duty structures

Time Horizon: Near-term (0-3 months)

Industry Context

India's Ethanol Blended Petrol (EBP) programme has expanded at an aggressive pace, driving OMC procurement of ethanol up to 705.43 crore litres up to June 2026. However, because feedstock growth (rice at 4.4% CAGR, sugarcane at 5.1% CAGR) lags behind demand, sugarcane diversion is facing scrutiny. The food-versus-fuel tension is particularly acute given that sugarcane meets 30% to 35% of the country's ethanol requirement but mills operate for only 3 to 5 months annually.

Key Risks to Watch

• Mandatory policy caps on sugarcane-to-ethanol diversion during supply shocks.
• Margin compression due to falling ex-mill sugar prices, which corrected from ₹67 per kg to ₹55 per kg.
• High dependency on volatile monsoon patterns that impact sugarcane crop yields across key states like Maharashtra and Karnataka.

Recent Developments

EID Parry reported its Q1 FY27 results on August 12, 2026, posting a 42.5% YoY decline in consolidated net profit to ₹141.60 crore. Separately, the Indian government approved duty-free imports of up to 10 lakh metric tonnes (LMT) of raw sugar valid until October 31, 2026, to cool domestic speculation and boost supply.

Closing Insight

As the 'food versus fuel' debate intensifies, the sugar sector faces a transition from a guaranteed growth trajectory to a policy-hedged, cyclical model. Investors must closely monitor regulatory actions regarding blending flexibility, as any move to E15 could temporarily alter the revenue mix of major producers like EID Parry.

High Performance Trading with SAHI.