Even as the market saw an uptrend in March, which included the Nifty clocking record highs, there are concerns on the runaway rally.

Ambit Capital cautions investors regarding this and asks them to be careful about it.

“There is an underlying economic weakness in the country. This combination of the weakness and the rally makes us uncomfortable about chasing the market…there is no point in chasing the market in an economy with underlying sluggishness,” Saurabh Mukherjea, CEO, Ambit Capital told CNBC-TV18 in an interview.

The banking sector’s state makes one circumspect on the market and PSU banks need to see fresh equity infusion, he said. Unless this is done, the mess will not be resolved, Mukherjea highlighted.

"We have been beating around the bush for three years now. Either the government, the RBI or a public sector entity has to bear the bill to repair balance sheets of PSU banks," he told the channel. The Bill to repair these banks will be to the tune of USD 30 billion, he added.

Meanwhile, Mukherjea said that even if regulatory risks in pharmaceuticals are well known, there are a few stocks with attractive valuations.

On information technology (IT), he feels that issues around H1-B visa are overblown and that issues faced by the sector are more structural in nature. Going forward, he sees buybacks becoming a norm for the sector. He suggests having the largest play in the IT sector. “We understand the scares in IT and pharma, but will be foolish not to have them in our portfolio,” Mukherjea said.

In the financials space, he is worried about the mismatch between NBFCs' performance and reports that have warned of credit risks. Many credit rating agencies are becoming circumspect on non-banking lenders. They have issued reports which state that credit risks, delinquencies are growing, but stocks have surged as well. This mismatch is worrisome, he said.

In the real estate space, he expects a correction from current levels till it bottoms out. He highlighted the government's crackdown on black money hitting the sector. But he also has had a few well-run real estate players, whose balance sheet looks in a reasonable shape.

Below is the verbatim transcript of Saurabh Mukherjea's interview to Sonia Shenoy & Anuj Singhal on CNBC-TV18.

Anuj: What is the sense for this market now? Do you think the risk reward is turning unfavourable after the kind of rally that we have had?

A: We have been circumspect for a while and even as we have been circumspect has not stop to the market running up.

We hold pretty much the same view that we have held over the last three-four months that there is underlying economic weakness in our country on the back of several things not just demonetisation, the overall state of the banking sector, the overall attack on black money, which we think has a huge long-term benefits for the country and that combination of underlying economic weakness plus the stellar rally makes us very uncomfortable about chasing the market. I have been consistently telling clients over the last three months that there is no point in chasing the rally. You are just storing up trouble for yourself if you buy overvalued stocks in an economy where there is underlying sluggishness.

Sonia: The other issue I wanted to discuss with you was the banks. We have heard a lot of talk about the possibility of some non-performing assets (NPA) resolutions from the government, but nothing fruitful has come up until now. Are you circumspect or is this a rally that you would chase?

A: I can see where the government is coming from. I suppose they have a six month political window before they start focusing on the big state elections next year and obviously in 2019 they have got the big general election to focus on. I suppose the government has six more months in which they can have a final crack in doing something about the malaise in the banking sector.

My fear is that we have been beating around the bush on these same issues for a good three years now and ultimately, it comes down to three decisive factors. Someone out there either the government or the Reserve Bank of India (RBI) or public sector entity has to bear the bill for repairing the balance sheets of the public sector banks. So, the bill is going to be quite punchy somewhere around USD 30 billion, around 1.5 percent of gross domestic product (GDP). So, someone out there has to put their hand up and say I have got the money to help the PSUs, repair their balance sheet. It is not clear to me that we have figured out who those entities are who will bear the bill.

Secondly, there is a sort of delicate issue of – there are these 50 NPAs which you obviously know these 50 prominent companies, but as soon as you sort of give them a reasonably easy ride all manner of tricky moral has its question arise on the economic front let alone the fairly thorny political issues that are around bailing out companies in the power and the infrastructure sector.

Thirdly, if the government dedicates time, effort and money in bailing out the PSU banks then something else has to give on the budgetary fund. Given the sort of big ticket elections coming up in 2018 ca not see what exactly the governments will be willing to comprise in terms of expenditure in order to bailout the PSU banks.

Remember, the political dividend, the electoral dividend from bailing out banks is not particularly big. So, I somehow feel that this was same sort of dance that we have done around NPA issue for the last three years will continue for six more months and hence that is one of reasons I am circumspect on the market and the economy because of these enfeeble state of our banking sector.

Sonia: What do you think the solutions could be? I mean the list of complaints is very long, but what could be the outcome because now even the possibility of the formation of a bad bank has been dropped according to our sources. If you had to advise the RBI or the government what would you say?

A: Our advice would be much along the lines of the PJ Nayak Committee Report from May 2014 where the erstwhile Axis Bank CEO was very emphatic in saying that the government should create something like the Banks Board Bureau (BBB) that has been created and then overtime the Government of India’s holdings in PSU banks is transferred to a bank holding company. The bank holding company in turn goes and raises capital from foreign institutional investors (FIIs), domestic institutional investors (DIIs), sovereign wealth funds and so on and the bank holding company recapitalises our banking system. We need to bring in fresh equity into the PSU banks. Either the equity comes from FIIs, DIIs from the stock market or the equity is provided by government and quasi-governmental entities. Until someone grasp that nettle I do not think we are going to be getting out of this mess anytime soon. My hunch is what will be done over the next three-four months is an attempt will be made to address the issues but the attempt will be as much about optics as about substance.

Anuj: Two sectors where valuation comfort is there but the business is seeing a bit of a risk IT and pharmaceutical. How would you approach them now?

A: The regulatory risk on pharma obviously are extremely well known. I don’t think we at Ambit can claim to some superior insight as to what the Food and Drug Administration (FDA) or the European regulators will do next. I do believe that some of the front-lined pharma stocks, some of the large-cap frontline pharma stocks are trading at attractive valuations.

Yes, the regulatory issues are non-trivial, but given the USD 20-30 billion – 40 billion market cap stocks we are discussing here, I think people are over playing the significance of the regulatory issues and underplaying the strength of that free cash flows and franchises. So, amongst the front-line pharma stocks, I would certainly have at least the couple in my portfolio. I cannot give you names because of the regulatory reasons, but I think at least couple of frontline pharma stocks would be in my portfolio.

On IT, the issues are most structural rather than this H1B scare that Trump has created. The H1B scare is overblown, but the issues are structural around; slowdown in Indian IT companies topline growth and earnings growth but that being said the largest play in the sector is a well-run company. It is reasonably clear that buybacks will become the norm in this sector. Intelligent use of surplus cash to boost shareholder valuable becomes the norm in the sector. I would also have at least the largest play in the IT sector in my portfolio given that valuations are muted and franchise are inherently attractive.

So understand the scares in both sectors but I think given the quality of our top IT and pharma franchises, it will be foolish to have a portfolio which doesn’t have a liberal amount of the top IT and the pharma franchises in the portfolio.

Sonia: Just coming back to the view you had on NBFCs you have spoken about how the crisis in the lending system could bring the entire system under further pressure, but this is something that street knows – the kind of problems that we have had with commercial vehicle (CV) lending with trucks etc. Don’t you think all of that is in the price already or do you see more?

A: If you see the last three-four months very interesting set of things are panning out. The credit rating agencies are becoming more and more circumspect with their view on non-bank lenders. I am using non-bank lenders in the wider sense of the world that includes micro finance institutions (MFIs) and small finance banks and so on. So, the credit rating agencies through December, January and February have issued a series of reports highlighting that the credit risks are growing, delinquencies are growing, NPA quantums are rising and even while these credit rating agencies reports have come out, many of these stocks have gone on to hit new highs, many of them trade at anywhere between 3 times to 6 times price to book and I think that mismatch worries me.

Separately what I think is also very interesting is the sheer amount of money that has gone into Indian short-term bonds funds, liquid funds and so on and the mutual funds in turn have pumped that money into paper, into non-convertible debentures or bonds issued by the non-bank lenders.

That is where potentially the risks are greater that you have getting so much money entering the mutual fund community at the moment that money in turn has been put in to paper issued by these NBFCs. I am not so sure whether the credit ratings and these NBFCs will hold up and hence my big concern is this flow of money from retail investors to NBFCs via the mutual funds, I think there is a potential fault line there which could get exposed in the coming three-four months as the underlying state of the NBFCs becomes apparent and perhaps there are downgrades on the NBFCs paper.

Anuj: One sector which is making a comeback is real estate. I have heard a lot of people talk about it that at these valuations these stocks offer good bargain. Would you be in that camp and do you think real estate offers that good value right now?

A: We have always had in the last five-six years at least a couple of well-run real estate players typically from western and southern India. We have had these companies there and these companies balance sheets are in reasonable shape, so one does not have existential concerns about these entities.

Overall my reckoning is that real estate will be on going casualty of the intense black money crackdown that the Prime Minister has launched. I cannot see the government relenting on the black money crackdown. It is not just demonetisation it is the way various conduits via which money would enter the real estate sector those conduits are being shut one by one.

I think the overall outlook for real estate and land prices broadly regardless of overall outlook for real estate and land prices would be a meaningful correction over the next couple of years. I know they have corrected but I think there is some distance for the real estate correction to unfold further before the sector bottoms out. That being said I do admit that at least in western and southern India, we do have a couple of well-run real estate companies.