* Underlying profit up A$902 mln vs A$786 mln H1 2017
* Profit margin 4.7 pct vs 4.4 pct previous first half
* Shares down up to 3 percent in stronger market (Recasts throughout, adds shares, CEO quote, analyst quote)
By Byron Kaye
SYDNEY, Feb 23 (Reuters) - Australian No.1 grocery chain Woolworths Group Ltd said first-half underlying profit rose nearly a sixth as price cuts lured more shoppers, but its share price fell amid concerns it was sacrificing margins to win business.
Woolworths Chief Executive Officer Brad Banducci has been trying to win back customers from traditional rival Wesfarmers Ltd's Coles by triggering a price war.
Australia's supermarket sector is experiencing deflation in wholesale fresh food prices, pleasing shoppers but fuelling more aggressive competition.
"It is an intensely competitive marketplace," Woolworths Chief Executive Officer Brad Banducci said on a media call on Friday.
Australia's 10th-largest company by market capitalisation said net profit from continuing operations rose 14.7 percent to A$902 million ($707 million) in the six months to end-December, about the same size as its decline in the prior corresponding period when it began its discounting programme.
Though Woolworths said grocery sales jumped 4.9 percent, handily beating Coles's 0.9 percent gain in the same period, Woolworths showed only a slight improvement in its profit margin, to 4.7 percent from 4.4 percent a year earlier.
"The headline result seemed okay but the margins were a bit below expectations," said Danial Moradi, market strategist at Lonsec Research.
"They're getting strong like-for-like sales growth, better than Wesfarmers, but what's happened is the EBIT growth hasn't come through."
Woolworths shares were down 2.5 percent in mid-afternoon trade, while the broader market was up nearly 1 percent.
The group result included a A$10 million pre-tax loss from its budget department store chain Big W, narrower than a A$27 million loss the prior corresponding period. As with its supermarkets, Woolworths is cutting prices at Big W and ramping up its online offers.
CEO Banducci did not give profit guidance for the full year but said food sales growth had slowed to 3.7 percent in the current half.
The company declared an interim dividend of 43 cents per share, compared to a dividend of 34 cents a year ago.
$1 = 1.2752 Australian dollars Reporting by Byron Kaye in Sydney and Ambar Warrick in Bengaluru; editing by