UPDATE 2-KDDI Q1 profit drops 12 pct amid mobile price war

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By Noriyuki Hirata and Sachi Izumi

TOKYO, July 22 (Reuters) - KDDI Corp (9433.T) reported a 12 percent drop in its quarterly profit on Tuesday amid tough price competition in the mobile market, but Japan's second-biggest phone company kept its double-digit growth target for the full year.

KDDI has been offering heavy discounts to prevent customers from defecting to industry leader NTT DoCoMo (9437.T) and third-ranked Softbank Corp (9984.T) in an escalating price war.

KDDI's profit was also weighed down by a spike in depreciation costs, reflecting its plans to increase capital spending by 14 percent in the business year to next March.

But profit is expected to show a marked improvement from the second quarter due to the introduction of an installment payment plan in June that will enable it to save on incentives, and a plan to launch more attractive phones later in the year.

"We should be able to recover in the autumn and winter," KDDI President Tadashi Onodera told a news conference.

KDDI said its group operating profit came to 124.37 billion yen ($1.17 billion) in the April-June quarter against 140.9 billion yen a year earlier. Sales rose 3.1 percent to 870.5 billion yen.

For the year to March, KDDI stuck to its profit forecast of 443 billion yen, up 10.6 percent from 2007/08.

That compares with 458 billion yen profit that 16 analysts expected on average, according to Reuters Estimates.

KDDI has also been struggling to turn around its loss-making fixed-line business, a market in which it trails former state monopoly Nippon Telegraph and Telephone Corp (9432.T).

KDDI said last month it would offer free calls between land lines and mobile phones 24 hours a day in an effort to persuade its mobile users to sign up for its fixed-line services as well.

Shares in KDDI rose 7.7 percent in the three months to June 30, outperforming a 4.1 percent rise in the Tokyo Stock Exchange's information and communication index .ICOMS.T.

Before the announcement, KDDI's shares closed up 0.3 percent at 587,000 yen. The subindex rose 0.8 percent. (Reporting by Sachi Izumi; Editing by Michael Watson)