Sugar output is likely to increase by 15% in sugar season 2025-26 to about 35 million tonnes on a favourable monsoon, a report said on Friday. India's gross sugar production is likely to rise 15% in sugar season 2026 to about 35 million tonnes, aided by above-average monsoon, boosting cane acreage and yields in key sugar-producing states like Maharashtra and Karnataka, Crisil Ratings said in the report.The growth is expected to ease tightness in the domestic supply and has the potential to boost ethanol diversion and revive exports with appropriate policy support, it added.This would offer sugar mills some relief from challenges of high cane costs, subdued ethanol prices and muted exports that compressed their operating profitability by 200 basis points to 8.7-9% in fiscal 2025.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%, said the report, adding that this is likely to support credit profiles of sugar players, which saw some pressure last fiscal.Over the past two seasons, while the fair and remunerative price of sugarcane has risen 11%, ethanol prices have largely remained unchanged, compressing the miller's revenue-cost dynamics.In sugar season 2026, diversion for ethanol is expected to rise to 4 million tonnes (from 3.5 million tonnes in sugar season 2025), supported by high sugar output and the government's 20% blending target (19% average achieved so far), as it offers faster cash-flow churn, said the report."The strategic diversification to ethanol was intended to de-risk earnings and cash flow of sugar mills. But rising cane costs (cane FRP has been hiked by 4.5% to Rs 355 per quintal for sugar season 2026) and stagnant ethanol procurement prices have limited improvement in profitability.""As a result, the operating margin of integrated millers is likely to improve only marginally by 40-60 bps to 9-9.5% despite a 15% jump in sugar output. That said, standalone millers, lacking distillery or co-generation power sales, may continue facing margin pressure," Crisil Ratings Senior Director Anuj Sethi said.The report further stated that sugar prices are likely to remain range-bound with output expected to rise, limiting any significant upside in profitability of sugar millers.Crisil Ratings estimated exports, restricted at 1 million tonnes in sugar season 2025 owing to domestic supply concerns, are likely to continue at similar levels in sugar season 2026 with high sugar output and opening inventory of 2 months of consumption.That said, any easing of export curbs will depend on the decision to divert higher volumes for ethanol, adequate domestic availability, benign inflation trends and favourable global price parity as seen in sugar season 2023, it added."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 spending restricted to routine modernisation, overall debt levels of integrated players are expected to remain under control," Crisil Ratings Director Poonam Upadhyay said.For the upcoming season, there is a need to watch the temporal and spatial distribution of monsoon, its impact on cane yield, timely ethanol price revisions and clarity on export policy amid global sugar price movements, the report added. Sugar Prices Extend Gains As Recent Price Dip Draws In Buyers. Read more on Economy & Finance by NDTV Profit.