SAO PAULO, Aug 14 (Reuters) - MRV Engenharia e Participações SA, Brazil's largest low-income homebuilder, reported a 32.2 percent increase in second-quarter profit despite an economic slowdown that has hurt its market in some parts of the country.

The builder, controlled by billionaire Rubens Menin and his family, earned 188 million reais ($54 million) in the quarter, according to a Friday securities filing. The adjusted result surpassed the 120.4 million reais profit estimate in a Reuters poll of six analysts.

The Belo Horizonte, Brazil-based company's gross margin rose to 29.2 percent from 27.8 percent a year earlier, mostly on better cost controls as the impact of older, less-profitable projects diminished.

Analysts have been optimistic on MRV's prospects as Brazil's economy heads into a recession. The company focuses on low-earning Brazilians, where the market remains firm due to enormous pent-up demand for homes and the support of a government housing subsidy program.

Co-Chief Executive Officer Rafael Menin said the company's geographical diversity has made it resilient in the current economic scenario, but it will maintain a conservative financial position even though its cash flow has improved because of the uncertainties facing Brazil.

"We should not think of buying back shares or increasing dividends. We have to have cash in hand and keep a low leveraged position," Menin said.

Contracted sales, a measure of first home purchases, totaled 1.43 billion reais in the second quarter, down 5.6 percent from the same period a year ago, the company said in a July securities filing. The value of project launches rose 3.9 percent to 1.088 billion reais in the same period.

Contract cancellations rose to 29.8 percent of total sales in the quarter, from 27.1 percent a year earlier. MRV recently cautioned that cancellation rates should remain at current levels throughout the year.

Free cash flow totaled 154 million reais in the quarter, up 11.7 from a year earlier.

($1 = 3.4815 Brazilian reais) (Reporting by Juliana Schincariol and Anthony Boadle; Editing by Leslie Adler)