FMCG major Hindustan Unilever (HUL) reported resilient volume growth in a tough environment. However, a substantial increase in promotional activity severely constrained profit growth. Our concerns on weak rural demand and disruptive pricing action are playing out, and will cap earnings growth in the near-to-medium term, in our view. However, expectations are largely reflecting this and we see limited downside from here. Maintain Hold. Q2FY16 below expectations: HUL\u2019s Q2FY16 revenues grew c.4% y-o-y, slightly below forecast. Margins expanded c.40bps y-o-y, below estimates mainly led by profit decline in soaps & detergents (S&D) and beverages. Personal product revenues grew 9% y-o-y (in-line) while margins were better than expected. Overall, operating profits grew at a muted pace of c.7% y-o-y (-3.4% vs est). Muted demand; resilient volume growth: HUL\u2019s underlying volumes grew c.7% y-o-y in a subdued consumption environment. Rural demand has slowed down in recent times and is now growing at the same pace as urban. We cut our FY16e-18e est by c.1-4% as we factor in 2Q16, and the prolonged nature of the slowdown. Limited margin gains: We have been skeptical of commodity benefits for HUL, due to the risk of disruptive pricing action and rise in promotional spends. These concerns are playing out, as seen in the muted margin gains in 2Q16. The company stepped up both media spends and promotional activity, particularly in the S&D category. We slightly lower our Ebitda margin est. by c.40bps for FY16e and maintain our FY17e\/18e est. Valuation\/Risks We cut our EPS est. by c.4-6% as we incorporate the changes above and raise tax rates as indicated by the management. We roll forward our P\/E based TP which now stands at Rs 818\/ share (35x 1-year fwd earnings). While our concerns on the business are playing out, we believe expectations now largely reflect this. Consensus earnings have come off in recent months and we see limited downside from here. Maintain Hold. Risks: Swift demand revival on the upside and severe pricing deterioration on the downside.