The Pakistani textile sector after performing well in the first half of the fiscal year with the appreciation in rupee by almost 6 percent against dollar in the third quarter of FY14 (Jan-Mar 2014), led to significant drop in profits of the export-oriented textile companies by 73 percent only in the third quarter of FY14.

This significant drop in profitability in the last quarter eroded the overall earnings of the textile sector for nine months. Textile sector recorded a decline of 9 percent in earnings during the nine months (July-March) of FY14.

Decline in profits was seem mainly due to massive drop in the earnings during the third quarter of the fiscal year led by appreciation of the rupee against the dollar, eroding yarn margins and weak textile exports, which declined by 1.1 percent.

Although, Pakistani textile exports has increased overall by 2.3 percent in dollar terms but with the appreciation of rupee against the dollar has offset the gains. Thus, in rupees term,textile exports has declined by 1.1 percent in the quarter ended March 31 to reach Rs358 billion against Rs361 billion in the previous quarter.

Major decline, in rupee terms, can be observed in the export of raw cotton, knitwear and cotton yarn, which declined by 43.5 percent, four percent and 3.4 percent, respectively.

Decline in raw cotton and cotton yarn can be attributed to relatively lesser orders from China.

In addition, availability of cheaper Indian yarn in the local market further dented the profit margins as evident from the eight percent fall in the primary margins of yarn.

Further rupee appreciation in the current quarter, subdued orders from China, any disruption in the gas supply to the textile sector and materialisation of the proposed 2-17 percent tax on the exports of textile products may exert further pressure on the profits of the textile sector.

The recently awarded GSP Plus status from the EU and consequential rise in the local demand will likely to ease-off this pressure but to some extent. However, new cotton crop will set the direction for the next season, which is likely to reach the market by August.