MUMBAI: Anand Rathi Securities is of the opinion that Punj Lloyd's third quarter performance is set to surprise positively, however, its risk-reward ratio is still unfavourable. Hence, the brokerage has recommended investors to sell the stock on the expected rally.

"Punj Lloyd's order backlog from Africa (Libya) at end-1HFY10 stood at Rs 99.9 billion. Of this, the major part was received in Jul 2009. We expect these orders to start contributing to revenue in 3QFY10 and thus expect Libya to fuel the future profitability of the company. We thus expect 3Q earnings to surprise positively but feel that the risk-reward ratio is still unfavourable. Thus, we recommend Sell on the expected rally," said the brokerage.

The company's order backlog at end-1HFY10 stood at Rs 268 billion, up 24% yoy, providing revenue visibility for more than two years.

The brokerage expects the company's margins to steadily improve. "We expect margins to steadily expand due to the greater contribution to revenue from Libya (higher-margin orders) and the exhaustion of legacy orders of SEC and Simon Carves. The company's focus on the low-margin road construction for order inflows next year could prove to be a dampener."

However, Anand Rathi is cautious as the possibility of disappointment from subsidiaries due to cost overruns in specific projects still exists. This increases the risk profile of the investment.

On the valuation front, Anand Rathi maintains its target price of Rs 200, which is 12 times FY11 estimated earnings.