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TOKYO, July 31 (Reuters) - Denso Corp, the world's second-biggest auto parts maker, posted a 16.7 percent drop in April-June operating profit from a year earlier as domestic labour costs rose and as automakers sold more compact cars in Japan that tend to be less profitable.
Denso's first-quarter operating profit was 85.1 billion yen ($828.1 million), below the 89.9 billion yen mean forecast of four analysts polled by Thomson Reuters I/B/E/S.
"Despite the variable cost reduction and the increase in production volume, the operating income decreased due to research and development expenditures and investment costs that will strength future growth," Executive Director Kenichiro Ito said in a statement.
Denso, 22 percent owned by Toyota Motor Corp, kept its annual forecast of 350 billion yen in operating profit.
Shares of Denso gained 1.62 percent in morning trade, outperforming the Nikkei index that climbed 0.4 percent.
Denso has the 13th biggest market capitalisation among Japanese companies, valued at around 4.4 trillion yen.
$1 = 102.7600 Japanese Yen Reporting by Yoko Kubota; Editing by Christopher Cushing