* IPO candidate sees margins shrink to 10.6% in Q2
* Margin drop at elevator unit due to higher material costs
* Group adj EBIT down 29% at 353 million euros
* Shares flat (Recasts, adds context on elevators unit)
By Christoph Steitz and Tom Käckenhoff
FRANKFURT/DUESSELDORF, Germany, May 14 (Reuters) - T hyssenkrupp's elevator business, the conglomerate's crown jewel that it plans to list, saw operating margins fall in the second quarter due to higher material costs that also hit Swiss rival Schindler.
The steel-to-submarines conglomerate last week unveiled a new plan to revive its depressed shares, abandoning an eight month-old plan to spin off its capital goods business and instead deciding on a flotation for elevators.
The unit, which also competes with Finland's Kone and United Technologies Corp's Otis, is Thyssenkrupp's prize asset and investors have long demanded that it needs to be listed, merged with a peer, or sold.
Adjusted operating profit (EBIT) margins at the division, however, fell to 10.6% in the second quarter, down from 11.6% a year earlier, Thyssenkrupp said on Tuesday.
It also lowered its margin forecast for the unit, now expecting its adjusted EBIT margin to remain stable at the prior-year level of 11.5 percent.
It had previously expected elevator margins to increase.
Thyssenkrupp said that was "mainly due to material and selling price trends in the USA owing to tariffs on material imports, and in China", which also led the unit's second-quarter adjusted EBIT to fall 3% to 198 million euros ($223 million).
Shares in Thyssenkrupp were little changed after the group also posted a 29% decline in second-quarter group adjusted EBIT to 353 million euros. Elevators accounted for 56% of that.
Schindler last month also blamed higher material costs, wage inflation, and a planned increase in expenditure on strategic projects for a surprise fall in first-quarter net profit.
A listing of Elevator Technology, which could be valued at 14-15 billion euros or nearly twice Thyssenkrupp's current market capitalisation, would provide a much needed equity boost to the group, whose net debt rose to 4.8 billion in the second quarter.
The division's sales and order intake rose in the January-March period, however, with demand coming from Europe and the United States. ($1 = 0.8898 euros) (Editing by Michelle Martin and Keith Weir)