(Reuters) -Hindustan Unilever, the Indian unit of UK's Unilever, reported a smaller-than-expected quarterly profit on Wednesday as the consumer goods maker incurred higher expenses amid a slowdown in urban markets.

The Dove soap-maker reported a near-4% fall in profit to 26.12 billion rupees ($310.8 million) for the second quarter ended Sept. 30, missing analysts' estimates of 26.88 billion rupees, according to data compiled by LSEG.

"When overall market demand signals are muted, we are seeing urban growth in the market moderating," CFO Ritesh Tiwari told reporters. "Now this impacts all the categories at Hindustan Unilever."

Rural demand has gathered pace over the last three quarters, including the July-September period, overtaking growth in urban pockets, which accounts for two-thirds of Hindustan Unilever's revenue.

However, Tiwari said the longer-term prospects for consumer goods makers in India is "bright," adding Hindustan Unilever will double down and invest more in the world's most populous country. He did not provide details.

For the reported quarter, expenses rose 3% to 122.65 billion rupees due to higher tea and crude oil prices, weighing on the bottomline.

Still, sales volumes grew 3%, helped by an increase in rural spending, which led to a 2% rise in revenue to 153.19 billion rupees.

The company's shares, which have been largely flat this year, closed nearly 1% lower before the results.

Among peers, Nestle India reported a drop in profit on higher ingredient prices, while soft drink makers Dabur India and Varun Beverages posted downbeat India numbers, blaming higher-than-normal rains.

Separately, Hindustan Unilever said it is separating its ice cream business, which accounts for 3% of its revenue, to focus on its core categories, adding that it would decide on the mode of separation by the year end.

This follows its UK parent's decision to spin off its ice cream unit, home to the Magnum and Ben & Jerry's brands.

($1 = 84.0480 Indian rupees)

(Reporting by Praveen Paramasivam; Editing by Sonia Cheema)