Buying was seen in the midcap indices on Monday as they outperformed benchmark — Nifty and Sensex in trade today. While the Nifty Midcap 100 index and BSE Midcap index rose over 1 percent each, the Nifty and Sensex were trading around 0.5 percent higher.

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In the BSE Midcap index, IGL was the top performing stock, up over 7 percent, followed by Max Financial Services, Varroc, Adani Power, Crompton Greaves, and KIOCL, gaining in the range of 3.9-4.5 percent.

For the last 18 months, the midcap indices have been under pressure due to a sharp rise in crude oil prices and uncertainty around the central elections among other issues. While Sensex gained 7.2 percent in 2019, BSE Midcap lost 13.5 percent during that period.

"Valuations of midcaps and smallcap stocks, which were frothy and had a premium over large-caps until last year, cooled off significantly due to sharp corrections," Prabhudas Lilladher said in a report.

"With new fresh, and affirmative mandate for the BJP, FII and DII inflows are expected to improve and this gap in valuations is likely to dwindle. We feel there is a significant opportunity to generate Alpha in this space," it added.

As per AMFI, during CY18, large caps accounted for 74 percent of net inflows in mutual fund investments, while midcaps accounted for 23 percent. But for the period January-April 2019 net inflows in midcaps as a percentage of total inflows, has increased from 40 percent last year 43 percent. Meanwhile, large caps are down to 25 percent as compared to 31 percent previously.

With a benign inflation outlook, the brokerage expects RBI to be incrementally dovish on interest rates, which will enhance liquidity, which in turn will help midcaps outperform over the next three years.

JSPL, Motherson Sumi, Shriram Transport, Berger Paints, and Federal Bank are the top midcap picks of Prabhudas Lilladher.

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