Medium and heavy commercial vehicle sales continued on a downhill path, with the combined domestic sales of Tata Motors and Ashok Leyland falling by 10.5% in August.

Except for the aberration in June when sales were flat, sales have declined in each month this financial year. In July, sales had fallen by 10% and in May volumes had dipped 11.7%.

The medium and heavy commercial vehicle division is the biggest revenue generator for both Tata Motors and Ashok Leyland. Declining sales at the division have led to the stocks underperforming in the market by 32% and 24% since January this year.

But lately, both stocks have done well—rising by more than 15% from their lows in August, higher than the 11% rise in the Nifty. One of the reasons could be that these stocks are making up for past underperformance. Besides, other segments have almost made up for the fall in medium and heavy commercial vehicle sales. In Tata Motors’ case, for instance, light commercial vehicle sales jumped 22.8% last month, which coupled with higher exports, negated even the fall in passenger vehicle sales. For Ashok Leyland, high growth in the sales of buses has largely offset the fall in volumes of goods carriers.

But the main reason for the new-found optimism about these stocks is the benign outlook for interest rates.

Rising rates were the primary reason for the sharp drop in sales, as the cost of operating a truck had increased substantially. Some analysts now expect sales to revive from the end of this calendar year. But it’s important to note that sales started falling on a year-on-year basis only in April. Before that, the base was continually rising, so companies would have to contend with a high base. Also, some analysts point out that some operators began to flout the ban on overloading this year, which also contributed to the drop in sales of new vehicles.

While the news on interest rates is positive, it remains to be seen if commercial vehicle companies are able to tackle all other factors that have led to declining sales this fiscal.

Hero Honda Motors Ltd reported a surprise 12% jump in two-wheeler sales in the last month, after going through a sales decline by 4.3% in the April-July period. Bajaj Auto Ltd’s two-wheeler sales were 6.5% lower last month—slightly better than the 11.8% fall in the April-July period. Sales of the two-companies put together have risen by 3.5%—much better than the 7.4% fall recorded in the first four months of the financial year.

Does this indicate a revival in two-wheeler sales? The stock markets aren’t yet willing to arrive at that conclusion. Both Hero Honda and Bajaj Auto shares have remained flat since the August sales figures were released.

Analysts say that the high inventory held by these companies have been reduced considerably by July, leading to a better performance in August; but that’s hardly reason enough for a re-rating of the sector. One would have to wait and see if the improvement in sales continues. The reality of a slowdown in two-wheeler loan approvals by banks and the adverse impact of higher interest rates on two-wheeler demand continues to loom large.

Analysts also are sceptical about the revival theme because Bajaj’s sales have continued to decline. TVS Motor Co. still hasn’t reported sales for August, leading to guesstimates that its sales would have declined sharply last month.

Meanwhile, Hero Honda and Bajaj Auto trade at rich valuations of about 18 times core earnings for fiscal 2008. In addition, despite the double whammy of underperformance in terms of sales growth and negative news about the value of its holding in an insurance joint venture, Bajaj Auto’s shares have remained flat since April.

Shares of Hero Honda, whose fundamentals have relatively been much better, were also flat during the same period. This indicates that there’s more to the performance of these stocks than just underlying fundamentals.

Analysts say that the supply of these shares in the market is low as institutional players have continued to hold on to them as long-term bets.